The Bitcoin rate spike, still alive despite bitter divisions in the community that supports the cryptocurrency, has laid bare the biggest problem with Bitcoin: Compared with fiat currencies, it’s painfully inconvenient and expensive to use as a means of payment.
Bitcoin is set up to reward users for verifying transactions. Miners who package transactions into “blocks” receive two kinds of rewards: The additional Bitcoin they produce by using their hardware to solve mathematical problems (an income stream that will eventually cease since 21 million bitcoins are the maximum that can be mined) and the transaction fees paid by users to get their payments into blocks.
The Bitcoin system is designed around scarcity and its traditionalists insist on keeping the block size small (rebels who did away with that tenet founded an offshoot, Bitcoin Cash, earlier this year). Their reasoning is that only people with more computing power can live in a big-block world and going down that path would make Bitcoin less democratic. But that horse has bolted: Mining is already largely the province of people who invest significant money in equipment and the huge amount of energy required to run it. As Bitcoin’s exchange rate rose rapidly and more people wanted to get in on the boom, getting into blocks became difficult, and miners prioritize transactions on which users are willing to pay a higher fee. It works a bit like Uber’s surge pricing, except the user sets the fee based on how long she’s prepared to wait for the transaction to go through — using one of several sites that link fees to waiting times or show median and average fees. ..