Bitcoin Transaction Cost and Armored Car Delivery

I’m still not worried much about Bitcoin becoming too popular and the resulting increases in network congestion. Last time I wrote about this was last summer.

As I said at the time, as far as congestion is a problem, that’s a good problem to have, since it shows that the service is popular. The Internet didn’t die either because too many users were added and congestion resulted.

Now I would like to add a different thought. Armored car delivery of cash.

One of the advantages of accepting Bitcoin as payment at a brick and mortar store is that you don’t have to worry about transporting the cash to your bank, or getting your cash register robbed. But if you use cash at your store, you need a way to transport it safely to your bank. That’s where armored car delivery services come in.

(Image Credit: Wikipedia)

For the purpose of this post, I googled around a bit and found out that one delivery trip with an armored car costs “around $60 on the low end”.

Obviously that’s much more than having your store manager walk over to the bank twice a day. The added cost is justified by the added security.

In exactly the same way, the Bitcoin network is designed to be trustworthy and secure. It is not designed to be the most efficient way of moving numbers around in databases.

If you look at the amount of hash power going into securing the Bitcoin network, the numbers are astronomical. They are calculated in trillions of hashes per second, and are now moving between 3 and 4 million of those.

At around 300,000 transactions a day right now, that’s about ten trillion hashes per second for every transaction approved on that day, and since a day has  86,400 seconds, we are talking about around 864 thousand trillion hashes to confirm one single transaction (on average).

It is clearly unreasonable to expect this to happen at no cost to the user, just as it would be unreasonable to expect armored car deliveries to be priced without taking the added security into account.

And actually the Bitcoin network does a good job at keeping cost down. The cost as a percentage of total volume sits at 0.62% right now (March 2nd, 2017), and is down compared to two years ago, when it sometimes spiked to over 4%.

The latest data for cost per transaction sits at $7.89 (March 1st, 2017), also way down from spikes to over $75 three years ago. Note that most of those costs are retrieved from block rewards, total fee income for miners is only around $1 per transaction right now, assuming 300,000 transactions a day.

So yes, the days where Bitcoin had so small numbers of users that they could expect to send their money for free are gone. That’s possible if you run your amateur experimental currency on spare CPU capacity. It’s not if you use 86.4 million trillion hashes to confirm one single transaction and if you run the World’s largest cryptocurrency network.

I for one think that’s a good thing.

Edited on March 26, 2017, to correct an error in hash rate estimates.


One Comment

  1. Thus, the issue of centralization is not as clear-cut as transaction costs; it is possible that neither gold nor Bitcoin is a winner in this category. Both assets are susceptible to centralization, which can have negative impacts in both cases.

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