Letter #2: What Drives Transaction Costs On The Bitcoin Blockchain?

Read now to learn how supply and demand are one of the most significant determinants of per transaction costs for Bitcoin.

Dear Readers,

If you’ve spent any significant amount of time reading about or transferring cryptocurrencies like Bitcoin, then I’m sure you’ve encountered periods of “high” transaction (i.e. network) costs. A transaction cost or fee is the amount that you pay a payment processor to transfer your money from one location to another, like from one Bitcoin wallet to another or from your credit card to a business. For obvious reasons, we want transaction costs to be as low as possible so that we can keep as much of our money as we can for future use. So why do transaction costs for popular blockchains like Bitcoin’s get so high sometimes?

In order to understand why transaction costs rise and fall, it’s important to have a basic understanding of the economic law of supply and demand. Simply put, as the supply of a good and the demand for that good change relative to one another, then the price that purchasers have to pay to suppliers, or that suppliers can charge to purchasers, changes. In other words, when demand is high compared to supply, prices will be higher, while when demand is low compared to supply, prices will be lower.