What If Bitcoin Was Worth Less Than Its Transaction Cost?

In a previous blog post I speculated that Bitcoin was worth no more than $600 given its pre-bubble historical value in dollar terms. That’s the value the market gives to transaction transparency and owner opacity, and not to its intrinsic value, which is zero. Why its intrinsic value is zero is handled in another blog post. Yet another blog post addresses the opacity component of Bitcoin, which is under assault by the IRS and thus is diminishing in value.

Transaction fees have been in the press recently, particularly since they spiked as high as $37 per transaction, about the same time that Bitcoin hit around $19,000 per coin. They have fallen back to a more reasonable $4 per transaction with the pullback of Bitcoin prices (touching this week at $8700). This has made Bitcoin an impractical currency to use to buy pizzas (the item purchased in the very first Bitcoin transaction), but for transactions more than $150 the transaction price is comparable to a credit card merchant processing fee.

This happy situation is not likely to last as Bitcoin mining costs continue to escalate. The amount of power required to maintain the blockchain ledger is already stupendous, and this power is a cost in an addition the hardware that miners have to cover before making any money at mining. As the load on the ledger increases the mining costs will continue to increase, which in turn will pressure transaction prices. Add in an occasional bubble where the supply of miners becomes precious, and the transaction prices can get quite dear indeed.

Without some change in the economics behind Bitcoin, say a set of viable cryptocurrency competitors that will take the transaction load off the Bitcoin ledger, users may find themselves in the odd situation of having to pay transaction costs in excess of typical everyday uses for the virtual coinage. And how about this–the IRS succeeds in cracking owner opacity, driving that component of value to zero–leaving only the transparency component, which is itself has probably far less residual value than the opacity. When that happens the unit value of the cryptocurrency could actually fall below the transaction cost of using it. And when that happens, well, it looks like we will all be back to stuffing our mattresses with fiat currencies and burying gold in the backyard again.

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