Bitcoin miners’ revenue from transaction fees is falling to record lows, and debates are raging online about the importance and long-term implications of this data. Current fee income accounts for barely 1% of total miners’ revenue, a significant drop from the peak of the last bullish market cycle when, for example, in February 2021, fees accounted for over 13% of monthly revenue. This data has been the subject of intense controversy on Twitter like everyone else Decentralized Financial Researchers to Bloomberg journalists to professional cryptocurrency traders Weigh the doom (or lack thereof) signaled for Bitcoin by low fee income.
This article provides an overview of the latest bitcoin fee income data and answers the question of whether it matters in the short or long term that fee income is low and declining relative to total income.
Current fee income data
Although recent heated debates about the importance of fee income have only surfaced in recent weeks, transaction fee income for miners has been relatively low for several straight months. The line chart below visualizes network fees as a percentage of monthly mining revenue. From early summer 2020 to spring 2021, fee income showed a strong upward trend. However, things changed quickly last summer when China banned bitcoin mining. Fee income has yet to recover.
However, the current fee income is not unprecedented. The chart above shows similar levels on a percentage basis throughout the 2018 and 2019 bear market.
And miners don’t necessarily complain. Since August 2021, their total monthly earnings have surpassed $1 billion each month, and April 2022 shows no signs that they will buck this trend. The bar chart below shows the total monthly revenue (subsidies and fees) paid to miners each month for the past five years. Fee income is shown in orange above each bar, and significant fluctuations in the amount of fees paid to miners in dollars are evident.
But miners still make money for securing the network and processing transactions. Sure, mining is becoming more competitive as both large and small miners add more and more hash rates to the network. However, the overall mining revenue is still substantial thanks to the Bitcoin protocol’s mining subsidy, adding to the already large coin stashes that many miners have stockpiled.
Why are the fees low?
The first and most obvious question about Bitcoin fee revenue is why is it low?
For context, fees represent one of two parts of a reward system for miners serving the Bitcoin network. Fee income varies based on network usage. So if fewer people are using Bitcoin, miners will earn less fee income. The other part of mining payouts is the block subsidy, a fixed bitcoin amount paid for each block and known to be halved roughly every four years. Eventually (meaning a few centuries from now), the subsidy drop to virtually zero, leaving transaction fees as the only source of revenue for miners backing bitcoin.
Looking a few hundred years into the future, the obvious potential problem is that if the subsidies are gone and fee income is still low, miners will not get paid and an important part of Bitcoin’s security incentives will evaporate. This specific incentive is usually referred to as Bitcoin’s security budget, which represents the total amount the network pays to miners. In other words, the security budget is how much each bitcoin user pays in total for mining as a basic service to keep the network running and protected from attacks.
The line chart below visualizes some of the fee income data contextualized with daily transaction levels on Bitcoin. The precipitous drop in fee income is evident, and at the same time, transaction levels are flat at best after a noticeable drop throughout most of 2021.
Therefore, the simplest answer to why fees are low is that bitcoin is used less than it used to be. So why is bitcoin less used? This question is harder to answer. Reasons for the current lower usage of Bitcoin range from increased usage of Layer 2 (e.g. Lightning Network or Liquid) to general boredom as price volatility continues to fall.
Is low fee income a problem?
In the near term, the impact of low fee income consists mostly of sporadic Twitter drama as critics attempt to extrapolate today’s fee levels into predictions of Bitcoin’s sustainability decades and centuries ahead.
Bitcoin is currently only in the middle of its fourth halving period with a payout of 6.25 BTC per block. The subsidy will still be above 1 BTC for two more halving periods and above 0.1 BTC for at least 20 more years. While regular monitoring of network health is important, alarmism about the current status of toll revenue is premature.
All available fee data represents an unhelpful amount when considering the future lifespan of the Bitcoin network. Fee income is also very volatile, making it even more difficult to accurately calculate fee income forecasts. At the peak of the recent bull market, fee income accounted for about 15% of total monthly mining revenue. Today, that level has dropped to just under 1%. Will these large swings continue? Nobody knows for sure.
In short, the current fee income is no cause for panic, but there is no justification for ignoring this important data either.
Will fees go up again?
The simplest and most historically reliable reason for the recovery in fee income is another red-hot bull market. But at a deeper level, fees will only increase if demand for bitcoin block slots also increases. Fees increase when people want to use Bitcoin. Options for cultivating this demand range from simple proliferation and everyday use of bitcoin for payments to more controversial and more complex endeavors like building a decentralized financial ecosystem on top of the bitcoin blockchain.
And it’s okay that future fee income is an open question – for now. Almost all of the doom and gloom being aired on social media about low Bitcoin fees is given the small dataset of historical fee income available to analysts and the sheer amount of time until the mining subsidy is so low that it becomes irrelevant and fees, poorly justified the only source of income from mining.
Last but not least, Bitcoin has proven to be a reliable piece of technology. In the last ten years, fee income has gone up and down. What fees will be incurred in 100 years is quite simply an open question.
This is a guest post by Zack Voell. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.