Big transaction fees are a problem for bitcoin — but there could be a solution

Bitcoin

Anatoliy Zhdanov | Kommersant | Getty Images

Bitcoin's price isn't the only thing soaring to colossal levels.

People are currently paying $28 on average to make transactions using the digital currency, according to data by BitInfoCharts.

Users of cryptocurrency exchanges like Coinbase incur such transaction fees when transferring money to an external bitcoin address. Bitcoin addresses are like virtual bank account numbers where users can store their bitcoin tokens.

Last week, a journalist said on Twitter that he paid $15 to send $100 worth of bitcoin from a digital wallet to a hardware wallet.

And earlier this month, another person claimed on Twitter that he had to pay a $16 fee to send $25 worth of bitcoin from one bitcoin address to another.

Bitcoin transaction fees are proving to be profitable for so-called bitcoin "miners". Miners work out complex cryptographic puzzles to add transactions to the blockchain, a decentralized record of all bitcoin transactions. They are paid in bitcoin in return for their services. On Monday, the total value of all transaction fees paid to miners hit an astronomical sum above $11 million on that one day, according to Blockchain.com data.

Transaction times

A debate has been brewing among the bitcoin community surrounding transaction times and fees. Right now it takes an average time of 78 minutes to confirm a bitcoin transaction, according to Blockchain.com. But on Sunday the average time was as high as 1,188 minutes.

Slow transaction speeds and fees has led to a number of splits in the original blockchain. In August, the blockchain was forced to split in two — a phenomenon known as "hard fork." This led to the creation of a bitcoin spinoff called bitcoin cash. Another fork occurred in October, spawning yet another digital asset called bitcoin gold.

These bitcoin offshoots have spawned because some within the bitcoin community believe that the size of blocks — records of transactions on the network — should be increased. A proposed update known as SegWit2x would have increased the block size from one to two megabytes, but this was dropped last month.

The boss of blockchain firm Ripple, whose digital currency XRP is the fourth-largest by market value, is skeptical about the use of bitcoin for payments and transfers.

"I don't think bitcoin is well-positioned to solve the payments problem," Ripple's CEO Brad Garlinghouse told CNBC earlier this year.

Garlinghouse said that his firm's cryptocurrency was "enabling transactions in seconds," adding that the cost of transactions were "a fraction of pennie."

"Two years ago people thought bitcoin would solve all transactions, and I think what we're seeing is that that's not the way it's going to play out," he said.

With unprecedented interest in bitcoin, experts have said that this is clogging up the blockchain network, with people resorting to other virtual currencies — known as altcoins — instead.

"Ultimately the lowest fees for a transaction wins and as cryptocurrencies attempt to unclog congestion in their blockchains the ones with the most innovative means and lower fees have an advantage in terms of speed and cost," Charles Hayter, chief executive of the cryptocurrency comparison site Crypto Compare, told CNBC in an email.

"The problem in switching for actual payment now is a bit of a bet — the more established the crypto the more likely someone will accept it due to the lower volatility and conversion risk. A year ago low percentage of people would accept Ethereum but now a lot more would."

A potential solution to the problem

Slow transaction times and big fees might now be a problem for bitcoin, but there may be a solution.

"One of bitcoin's biggest problems right now is that so many people want to use the currency that from time to time the network gets bogged down," Ryan Radloff, co-founder and principal at CoinShares, told CNBC Tuesday.

"So what you have in that situation is you have other currencies that step up, they don't have as much demand to use the protocols yet, and will settle quicker."

But Radloff pointed to a potential solution to the issue known as the "Lightning Network."

"This is a technological implementation that, later this year, is going to solve this, and we're very excited about that."

The Lightning Network would essentially allow users to send multiple transactions to and from outside of the blockchain. It would work as a second layer on top of the existing distributed ledger network that underpins the digital currency.

This would make bitcoin more akin to the digital currency litecoin. Litecoin transactions take just over 2 minutes to be confirmed, and cost an average of 60 cents, according to BitInfoCharts.

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