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Bitcoin – cheaper or not?

Bitcoin is an alternative to traditional banking services. But is it a good alternative? A good alternative should arguably be better, faster, cheaper, and easier to use than its predecessor to gain adoption. Bitcoin is faster and has so far gained value in comparison to fiat currencies, so it appears better in at least these two ways.

But is it cheaper and easier to use? As of the time of writing, purchasing Bitcoin is probably a bit of a challenge for the average person but it’s becoming easier all the time. However, the question “is it cheaper” is a nice quantitative question that we can analyze fairly well. So let’s try to compare Bitcoin to traditional banking.

As with traditional banking, there are costs associated with moving Bitcoin around. One common way to move fiat currency is through wire transfers. Wire transfers move money between individual and institutional accounts. Bitcoin has similar functionality but instead of bank accounts, individuals or institutions simply have “wallets” – these are basically bank accounts, but for electronic currencies like Bitcoin. Since both do similar things, we will look at transaction volume and fees between bank wire transfers and Bitcoin electronic transfers for the comparison. For wire transfers, I’ll use Fedwire data and for Bitcoin transfers, I’ll use data from blockchain.info.

TOTAL FEES PER NETWORK – Fedwire fees vs Bitcoin Fees

Fedwire is the service that the federal reserve uses, so they represent a large portion of American wires. Fedwire, since January to August of this year, has made 143 million wire transfers to and from banks across the nation. These transfers have a reputation in the finance community as being high value, fast, and cheap transfers for banks. The average Fedwire transfer fee is around 41 cents. Taking the prior number of total wires from Janurary to August, we can now determine money lost due to fees: $58.63 million dollars. This sounds like a lot, but is the alternative any better? Let’s compare it to Bitcoin.

Bitcoin provides services to anyone who sends or receives Bitcoin. So unlike Fedwire which caters exclusively to extremely high value transfers, Bitcoin provides its service indiscriminately.  Unlike many bank fees, Bitcoin’s fees tend to be dynamic – based upon the transaction size and the average fee other people are paying. So the average Bitcoin fee, from January to August, was $2.09. Which means the bitcoin network paid $130 million in fees.

COMPARING THE TWO

That’s 45% more in costs than the American banking system. And Bitcoin moves significantly less money per transaction than Fedwire. Fedwire will often transfer millions in each transaction… but that is expected because the transfers are between banks after all. Even if we used the medium Bitcoin fee, which was $1.36, we still end up with $91 million lost in fees. However, our low transaction fee for Bitcoin was $0.29 which would result in fees being lower than the Fedwire system at $19.5 million dollars.

CONCLUSION

On the basis of this cursory overview, Bitcoin appears to be a much more expensive way to move money around than traditional banking. That’s mainly because the Bitcoin network is farily new in comparison to most banking services. The Bitcoin network has seen huge increases in growth and adoption within the past year. However, Bitcoin is trying to find new solutions to meet the increased demand. Once new solutions are adopted transfer fees should begin to drop.

Further, I realize some readers may be thinking “but fedwire is between banks! Bitcoin, currently, is between private individuals and traders! That isn’t a fair comparison!” You’re right – it is not. However, the core developers and the users of Bitcoin should push for lower and lower fees to compete with the banking industry. This puts pressure on bankers to innovate. Indeed, innovation is key, innovation will help reduce the insane costs for personal wire transfers -which can range from $50-75. Why should a foreign wire transfers cost so much? When I can move money across the ocean for a couple of dollars with any cryptocurrency and have it arrive in minutes.

And the other point was alluded to above, wire transfer fees for individuals are much higher than for banking institutions. After taking the average of the above wire transfer fees (provided in the link) the average is $22.10. That’s about ten times the cost of Bitcoin’s fees.

But for now, Bitcoin is still relatively niche and mainly for individuals and traders. Perhaps Bitcoin or blockchain technology will revolutionize the banking industry soon, but that may be a pipe dream. For now Bitcoin enthusiasts, traders, and users have to deal with high fees until other solutions are developed.Bitcoin fee Bitcoin fee Bitcoin fee Bitcoin fee Bitcoin fee Bitcoin fee Bitcoin fee