High transaction fees for bitcoin payments claimed a casualty last week, when gaming site Steam announced it would discontinue the use of the cryptocurrency on its platform. In a statement, the game service identified bitcoin’s volatility and high transaction fees as reasons for its decision.
According to Value, the studio behind Steam, the fees resulted in “unreasonably high costs” for its games when the payment mode was bitcoin. “The high transaction fees cause even greater problems when the value of Bitcoin itself drops dramatically,” the studio stated. (See also: How Much Cheaper Are Bitcoin Fees As Compared To Credit Card Fees?)
The Relationship Between Transaction Fees And Bitcoin Price
Bitcoin’s average transaction fees have kept pace with the increase in bitcoin’s price. At the start of 2017, the average transaction fee for transactions that used bitcoin as a payment mechanism was $0.392. As of yesterday, it had risen to $21.567.
The price of a single bitcoin in dollar terms has shot up by more than 1,000 percent since the start of 2017. But it is difficult to ascertain causes for the increase. Even though the cryptocurrency has gained traction and has even been legalized in some countries like Japan, statistics regarding its usage are hard to come by. (See also: Bitcoin Gets Boost From Japan.)
Will High Transaction Fees Bring Down Bitcoin’s Price?
But will high transaction fees hurt bitcoin's price? Not really. Analysts surmise that bitcoin usage constitutes a very low percentage of the cryptocurrency’s transaction volumes. In July, Morgan Stanley payments analyst James Faucette wrote that bitcoin acceptance rate at merchants was “virtually zero and shrinking.”
Only three of the top 500 retailers accept bitcoin. According to Faucette, it was “way easier to trade speculatively than convince new merchants to accept the cryptocurrency.” “Bitcoin owners are reluctant to use the cryptocurrency, given its rate of appreciation, more evidence that bitcoin is more asset than currency,” he wrote.
The Importance of Trading Volumes In Transaction Fees
A BI Intelligence report states that it is “probable” that the increase in bitcoin's transaction volumes occurred due to an increase in trading for bitcoin rather than its use as a currency for daily use. Trading volume for bitcoin at the start of 2017 was $83 million. At 15:47 UTC on Dec. 10, trading volume for bitcoin was $14.5 billion.
Most exchanges charge maker or taker fees (depending on order book liquidity at the time of transaction and the time it takes to fulfill the transaction) of between 0.2% and 0.5% for bitcoin trades. (See also: What Maker-Taker Fees Mean To You.) Given bitcoin’s skyrocketing prices, that is a far more profitable transaction for users as compared to paying $21.50 in transaction fees to buy a $4 cup of coffee using bitcoin.