It has been a big week for BTC. PayPal’s announcement that they would support the token instantly expanded the network available to token holders seeking to use their BTC. Likely due in part to the news, the price of BTC has grown significantly and once again surpassed $13,000 USD.
The price required to buy the token is not the only thing on the rise, so too is the price of using it.
Consider the following graphs from Bitinfocharts.com.
For the better part of five weeks (September - early October), the price of BTC fluctuated between ~$10,200 and ~$11,000. After a quick uptick from ~$10,600 on October 7th to ~$11,400 on the 10th, BTC continued with relatively low price volatility for a week, reflected in the above chart. Then, on October 17th BTC saw a quick price increase, likely accelerated by the PayPal announcement, which pushed the price of the token up above $13,000.
While relatively high fees are now the norm on BTC (according to Bitinfocharts the average BTC fee was greater than $2 for the vast majority of the last 100 days), this week’s rise in BTC price coincided with a significant increase in the average price of transaction fees which are once again approaching $5 per transaction.
What is the significance of this relationship?
Because BTC has artificially scarce block space, only a small (and fixed) number of transactions can be processed over a given time period. As more people learn about and buy BTC, or gain access to it through its integration into successful financial services like PayPal (positive momentum), the amount of network activity should be expected to grow. However, because of BTC’s limited and fixed transaction processing capacity, users wishing to send transactions must outbid each other through ever-rising transaction fees to use the network (negative momentum).
Thus, a key side effect of the increased enthusiasm for, and subsequent use of, the BTC network works against its own momentum. In effect, the “BTC-engine” has a governor limiting its maximum speed (utility and value). What would otherwise be universally good news for both the network and token is hampered by the resulting increase in transaction fees: the network suffers because the cost to use it increases and the token suffers because its utility depends on the health of the network. Perhaps today’s average $5 transaction fee on the BTC network is not an issue for retail investors looking to get in early on what they hope is the next big BTC bull run. But how would that change if the fee was $50 as we saw at the end of the 2017 bull run? It could be possible that the fervor over news like PayPal’s integration of BTC is enough to overcome the increased cost of using the network, causing investors to continue to pile in despite even $50 fees. But what is the limit? Is it $100? $1,000? Where does it end?
Bitcoin is Unbounded
What is unfortunate about this self-limiting reality of BTC is that it is wholly unnecessary. When unencumbered by arbitrary limits like BTC’s block size constraint (which creates its fixed transaction throughput), Bitcoin is unbounded!
On Bitcoin (BSV) this transaction throughput constraint has been removed. With its removal comes the removal of the governor imposing a “speed limit” on the Bitcoin-engine. Without this speed limit, there is no self-imposed cap on the network’s utility and value generating potential. Positive momentum IS NOT met by counteracting negative momentum.
On Bitcoin, a positive momentum catalyst like the PayPal announcement could play out like this:
Positive news about the growth in value of the network
Increased enthusiasm and utility results in more transactions on the network
More transactions results in a greater generation of small fees (today the average BSV fee is $0.0002 or 0.02¢) available to transaction processors maintaining the network. Should the increased transaction throughput sufficiently strain transaction processors, the fee might begin to rise as processors struggle to process every transaction (for example, BSV transaction fees are often $0.0001 or 0.01¢. Thus, the current average transaction fee is double that level but still minuscule).
The ability to earn more transaction fee revenue (from more transactions generating fees and possibly also from increased fees per transaction) incentivizes more innovation by transaction processors to develop professional software and hardware to earn the available revenue.
As competition to meet this level of transaction processing continues, the average transaction fees fall back to a competitive price.
The increased professionalization of the network across all viable transaction processing competitors enables even greater utility (more transactions can be processed more cheaply).
Increased network utility further increases the appeal for new users and new integrations of the technology. This makes additional future catalysts for the first bullet point (“positive news about the growth in value of the network”) more likely and the cycle continues.
The beauty of Bitcoin is that this virtuous cycle can continue without limitation. It is in this sense that Bitcoin is unbounded.
Has transaction processor A already packed their data center full of computers in order to quickly and efficiently process transactions and earn fees? Build another data center!
Is transaction processor B already using state of the art high performance computers in their data centers? Invest in R&D to develop even better computers!
Since the BTC network has set a maximum throughput capacity, the incentive for innovation is eliminated. BTC transaction processors will hope that more people want to use the network so they can increase revenues by charging higher fees (on a fixed transaction quantity), but they will not be able to decrease the rise of fees through innovation. Unfortunately for BTC transaction processors, what will likely halt the rise in fees is the ultimate decrease in use of the network after enough users are priced out of using it and the speed limit has been reached.
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While as an investor it’s fun to see strong movements up-and-to-the-right for the price of one’s asset, it’s important to consider potentially self-limiting properties which may also be moving up-and-to-the-right at the same time. How might that factor into one’s valuation on the asset? Perhaps it is wise to bookmark Bitinfochart’s Average BTC Transaction Fee or Coin.Dance to check the less flashy metrics which measure network health, alongside one’s morning scroll of CoinMarketCap.
For a more in depth explanation as to why BTC (and other popular blockchain networks) have imposed speed-limit constraints on metrics like transaction throughput and why BSV has removed it download our free ebook: How BSV Will Win.