One of bitcoin's biggest problems is showing signs of getting better

  • Deutsche Bank examined whether bitcoin’s scaling problem is improving in a note out to clients this week.
  • Fees to transfer the coin have fallen even as the cryptocurrency price climbs back from lows set earlier this month.

“Is bitcoin getting better?”

That’s a question research analysts at Deutsche Bank examined in a short note sent out to clients Wednesday.

Analysts Paul Condra and Mrinalini Bhutoria examined how bitcoin’s scaling problem might be improving despite a slight uptick in the coin’s price.

Bitcoin, which was designed as a cheap, transparent payment network to rival old guard Wall Street and its big banks, became more expensive to use as the price climbed to nearly $US20,000 at the end of 2017. At that point, it cost upwards of $US30 to transfer a bitcoin.

Those fees, which go to miners who validate transactions on bitcoin’s network, can spike when there is an imbalance between mining capacity and the number of folks looking to make bitcoin transactions. When bitcoin was surging, that imbalance grew as newbies poured into the network. In a sense, the bitcoin networks operates like Uber, which employs surge pricing during busy travel times.

Deutsche Bank

Fees started to decrease at the tail end of last year as the price of bitcoin retreated from all-time highs. They continued to fall as bitcoin dropped to $US6,000 a coin at the beginning of February. Since then, however, the coin has made a comeback with its price and transactions steadily increasing over the last two weeks. But fees are still declining. So what gives?

Deutsche Bank has a multi-pronged explanation. First, less people are looking to transfer their bitcoin.

“Relatively weak demand compared to 4Q17 not creating the same supply/demand imbalance,” the analysts wrote.

Still, the bank says two other factors, a glut in mining capacity and Segregated Witness, a recent upgrade to bitcoin’s network, might also be playing a role in lower fees. Here’s Deutsche Bank:

“Increased mining capacity resulting in miners willing to accept lower-fee transactions; and gradual working through of the backlogged (“mempool”) transactions that likely have lower fees attached to them. While segregated witness (“SegWit”) implementations could also be driving this trend, we were not able to find a reliable source of data related to this.”

SegWit was released by bitcoin core developers in August and has slowly gained traction with some members of the community, including Coinbase.

It’s optional for exchanges like Coinbase to use the update. Currently, only 14% of all bitcoin transactions run on the SegWit update.

Garrick Hileman, cofounder of blockchain company Mosaic.io, told Business Insider new technological developments might be behind the lower fees, but “at the moment it appears that most of the drop off in fees is due to a corresponding drop in transaction volume.”

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