Big transaction fees are a problem for bitcoin — but there could be a solution

Bitcoin's price isn't the only thing soaring to colossal levels.

People are currently paying $28 on average to make transactions using the digital currency, according to data by BitInfoCharts.

Users of cryptocurrency exchanges like Coinbase incur such transaction fees when transferring money to an external bitcoin address. Bitcoin addresses are like virtual bank account numbers where users can store their bitcoin tokens.

Bitcoin transaction fees are proving to be profitable for so-called bitcoin "miners". Miners work out complex cryptographic puzzles to add transactions to the blockchain, a decentralized record of all bitcoin transactions. They are paid in bitcoin in return for their services. On Monday, the total value of all transaction fees paid to miners hit an astronomical sum above $11 million on that one day, according to Blockchain.com data.

A debate has been brewing among the bitcoin community surrounding transaction times and fees. Right now it takes an average time of 78 minutes to confirm a bitcoin transaction, according to Blockchain.com. But on Sunday the average time was as high as 1,188 minutes.

Slow transaction speeds and fees has led to a number of splits in the original blockchain. In August, the blockchain was forced to split in two — a phenomenon known as "hard fork." This led to the creation of a bitcoin spinoff called bitcoin cash. Another fork occurred in October, spawning yet another digital asset called bitcoin gold.

These bitcoin offshoots have spawned because some within the bitcoin community believe that the size of blocks — records of transactions on the network — should be increased. A proposed update known as SegWit2x would have increased the block size from one to two megabytes, but this was dropped last month.

Slow transaction times and big fees might now be a problem for bitcoin, but there may be a solution.

"One of bitcoin's biggest problems right now is that so many people want to use the currency that from time to time the network gets bogged down," Ryan Radloff, co-founder and principal at CoinShares, told CNBC Tuesday.

"So what you have in that situation is you have other currencies that step up, they don't have as much demand to use the protocols yet, and will settle quicker."

But Radloff pointed to a potential solution to the issue known as the "Lightning Network."

"This is a technological implementation that, later this year, is going to solve this, and we're very excited about that."

The Lightning Network would essentially allow users to send multiple transactions to and from outside of the blockchain. It would work as a second layer on top of the existing distributed ledger network that underpins the digital currency.

Source: Bloomberg Pro Terminal

Jr Trader Alexander Kumanov

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