The Reason You Won't Be Buying Coffee With Bitcoin Anytime Soon

The cost of using bitcoin has become such a large percentage of the transaction that it is no longer competitive.

This is probably a transitory growing pain as the market sorts itself out, but it suggests that the 'no oversight' model is fading, not because of regulatory pressure, but in the face of its own internal contradictions. JL

Paul Vigna reports in the Wall Street Journal:

The cost for investors and consumers to buy or sell bitcoin hit an average of $5 per transaction in June, the highest rate of its eight-year history as an alternative means of payment. Two years ago, it was less than a nickel. The growing use of bitcoin, whose total value now exceeds $40 billion, is stretching the limits of its current market structure. The fees are being borne by users.“The reason behind bitcoin isn’t really there anymore. Any currency where you have to pay a huge portion of the transaction just for the privilege of using that currency is no currency.”
Bitcoin was designed to be cheap, reliable and fast. Lately, though, many users are complaining that the digital currency is anything but.
The cost for investors and consumers to buy or sell bitcoin hit an average of $5 per transaction in early June, the highest rate of its eight-year history as an alternative means of payment. The fee has since come down to about $3.50. Two years ago, it was less than a nickel.
The figures, from data provider BitInfoCharts, show that the growing use of bitcoin, whose total value now exceeds $40 billion, is stretching the limits of its current market structure. In turn, dealing in bitcoin is becoming more costly and inconvenient, turning off some customers.
High fees make it impractical to use bitcoin as a day-to-day currency. Paying a $5 fee to send $10,000 bitcoin isn’t a big deal, but it’s hard to justify buying a cup of coffee with bitcoin if the transaction costs more than the coffee.
An array of bitcoin applications such as cross-border money transfers and small-ticket consumer payments need an affordable bitcoin network to thrive. With higher fees, “I think a lot of use cases start to die,” said Jonathan Levin, chief executive of research firm Chainalysis.
In recent years, consumers have been showered with rewards for swiping their credit cards—from cash back to airline miles and points for free hotel stays. The merchant pays the fee, the consumer gets the spoils.
In bitcoin’s case, the fees are being borne by users.
When Cameron Oatley, a 19-year-old student in Romsey, southeast England, recently sent a friend $30 worth of bitcoin on a U.S. platform, he was hit with a $6 transaction fee.
“The whole reason behind bitcoin isn’t really there anymore,” Mr. Oatley says. “Any currency where you have to pay a huge portion of the transaction just for the privilege of using that currency is no currency.”
Bitcoin transactions are processed by a group called “miners,” who maintain the network and get paid for their work in newly created bitcoin and through transaction fees. Until a few years ago, the fees were an afterthought. But rising activity has changed the math.
The increased popularity of the currency has pushed the number of transactions to about 260,000 a day from 100,000 a few years ago. The network however, still can only process about seven transactions a second, which has resulted in bottlenecks.
To expedite orders, end users have the option of offering a higher fee as an incentive to miners to process their transactions. The fee you pay can determine how fast you get bitcoin.

More on Digital Currency

• Volatile Digital Currency Suffers ‘Flash Crash’ (June 23)
• The Virtual-Currency War That Threatens to Tear Bitcoin Apart (June 20)
• The Bitcoin Selloff You Knew Was Coming Has Arrived (June 15)
• Bitcoin Drives to a New High, but Is It Headed for a Crash? (June 6)
• Bitcoin’s Unlikely Evangelist: Fidelity CEO Abigail Johnson (May 23)

Eric Piscini, a principal at Deloitte Consulting LLP who specializes in virtual currencies, recently tried to move a small amount of bitcoin without paying a fee. It took two days.
“It’s an issue,” says Mr. Piscini. “If you want to pay a merchant, either the merchant is taking the risk that the transaction won’t be validated, or he has to wait two days before he gives you the service or product.”
Bitcoin fees also fluctuate with demand; when trading is busier, the fee goes up. Some services like San Francisco-based Coinbase charge customers an average network fee; others allow users to manually set the fee themselves.
Rising fees have led the bitcoin community to renew efforts to solve problems with the currency’s market structure—the so-called “scaling” stalemate that essentially boils down to how many bitcoins can trade at one time.
The question of how to best increase network capacity has long divided the industry. Entrepreneurs, who have built businesses around bitcoin, see the currency as something to be used and exchanged frequently. Miners and developers, meanwhile, tend to see it as an asset to hold, like gold. They fear that increasing limits would make it more expensive to be a miner, driving out smaller miners and leading to a more centralized system.
The fight has dragged on for two years. New solutions to the standoff were recently proposed and may be adopted this summer, likely lowering fees. Several other potential breakthroughs, however, have fallen apart in the past.
Until the bickering ends, the only way for users to ensure their transactions get processed quickly is to offer miners higher fees. “You hope for the best,” says Cornell University computer-science professor Emin Gun Sirer.
Even though coming changes could alleviate high fees, Mr. Oatley says he’s done with the digital currency. “I’m not going to put another cent into bitcoin,” he said after selling his remaining stake in early June. “There are too many issues.”