Economics of Bitcoin as a settlement network

The Saif House

As Bitcoin’s popularity continues to increase, its transaction fees rise as well, leading to the customary chorus of doom and gloom by those still stuck in stage 1 of dealing with Bitcoin grief. With average transaction fees exceeding $2, the doom-mongers assure us Bitcoin is doomed, because nobody wants to pay $2 to make a payment, when credit cards, paypal, and many other options charge far less transaction costs.

The problem here, as usual, is not with Bitcoin, but with people’s misunderstanding of Bitcoin, and the first clue to that can be found in the sky-rocketing price: if Bitcoin is so doomed, why are people still buying it? The answer is that Bitcoin’s value proposition is not in making the small consumer purchases, but in making large and important payments, particularly across borders. Payments in person, for small amounts, can be conducted in a wide variety of options: physical…

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