Transaction fees for Bitcoin at record-highs

Anders Nysteen

Senior Quantitative Analyst, Saxo Bank

Summary:  Mining activity on the Bitcoin network has suffered a recent drop, and the fees for carrying out transactions on the Bitcoin network are higher than ever. We look into the underlying mechanisms and compare to the runner-up, Ethereum.


The transaction fees on the Bitcoin network have reach new all-time high, and the average transaction fee is now above USD 60. The average fee on the Ethereum network is also high, but not relative to Bitcoin:

Source: bitinfocharts.com

The network (should) align to the the mining activity

Transactions on the Bitcoin network are handled through processing of blocks of transactions. Bitcoin miners are competing for mining a bitcoin block, and the difficulty of doing this is adjusted on an ongoing basis. The Bitcoin protocol is designed to hit an average processing time of 10 minutes per block, and the processing time is regulated by changing the difficulty: if the hash rate (i.e. the activity from the miners) increases, mining of a block will be faster than 10 minutes and the difficulty needs to be increased. And likewise, the difficulty has to be lowered if the total miner activity decreases.

The difficulty is an important tool for regulating the activation and manufacturing of cryptocurrency to follow a pre-determined rate, and secondly it ensures a uniform production time of blocks, which may avoid possible attempts of fraud. Within the Bitcoin protocol, adjustments of the difficulty occurs after a fixed number of blocks have been processed, 2,016 specifically, corresponding to approximately every second week. Together with the limited size of a block, the average block creation time is the bottleneck for the throughput on the Bitcoin network.

Sudden drop in hash rate

Recently the hash rate of the miners has dropped significantly, and some crypto analysts associate this with a coal mine explosion causing a massive power outages in China in the mining hub of Xinjiang, which provides around ¼ of the global hash rate. At the same time, the shortage of semiconductor microchips is limiting the possibility for new miners to join the mining pool.

The bitcoin infrastructure does not seem fit for these sudden drops in mining activity as the network difficulty only changes every second week. As a result of the diverging mining activity and difficulty, it currently takes much longer than the expected 10 minutes to mine a block, thereby limiting the processing speed on the network. And with an increasing demand for carrying out transactions in a Bitcoin network with a lower bandwidth, higher fees are observed. This effect may be present until the next difficulty adjustment in the beginning of May, but we may hope that more miners come back online, and the hash rate goes back higher.

Ethereum difficulty regulating at a higher frequency

The current version of Ethereum is also utilizing mining for verification of transactions and also contains a dynamic adjustment of the mining difficulty. The difficulty is, however, updated with a much higher frequency as indicated in the chart below, and thus Ethereum is not as sensitive to changes in the hash rate as Bitcoin:

Difficulty on the Bitcoin and Ethereum network. Source: bitinfocharts.com

The original thoughts behind Bitcoin do not seem to have included the possibility of sudden dramatic decreases in the hash rate, and thus newer technologies such as Ethereum have the upper hand regarding transaction processing. This may also be one of the reasons why Ethereum has outperformed Bitcoin over the past couple of days, as the relative lack of applicability of Bitcoin has become even more evident.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.