It’s not news to anyone who has been following the cryptocurrency trend that, while they have attracted lots of attention, they have also failed to penetrate our economies as well as some analysts expected they would.
Indeed, cryptocurrencies have run into several difficulties, putting them into the odd position of being household names, but not household items. That is, everyone knows what a cryptocurrency is, but most people don’t own any or know how to use them.
Yet while the cryptocurrency craze has brought few widely recognized improvements to our economy, there is one specific area where it should, as penetration grows, show a great improvement in most peoples’ lives.
That area is transaction costs.
High costs we ignore
Bank transactions are never free. Every single transaction that happens involving a bank, be it a debit/credit card purchase, a bank transfer, issuing a check, or even getting cash via an ATM, has a cost.
The allied cost can often be small enough for people not to notice or care, and in some cases the cost is paid by our counterpart, so we completely ignore their existence.
However, these costs add up. It might be a few cents here or there, but little by little, they end up making a dent on our finances – we just don’t notice. When we hear that it costs $10,000 to move $1,000,000, we assume that’s a rich people problem.
We don’t have a million dollars to move, so why should we worry if the rich are paying a lot? They have a lot, so it’s only fair.
Except that it’s not the raw numbers that matter. It’s the percentages.
Fortunes are made cent by cent
Now, let’s assume instead of the 10K example, I tell you that your bank charges about 1% per transaction. It’s little, right? What’s one dollar for every hundred you move? The bank has to make money, so it makes sense they’ll charge.
Yet it adds up. That means that if you move only a thousand dollars a month using your bank account – a small amount of money – you’re paying your bank $10 a month. Which amounts to $120 a year.
Reconsidering it yet?
Crypto to the rescue
Cryptocurrency transactions have been somewhat demonized by the media. While most claims against them aren’t false, some have been overblown or reported as inherent problems with crypto while being transient ones, results of the economy rather than poor design.
While cryptocurrency transactions can be slow – the Bitcoin and Ethereum networks both have but a fraction of the capability of Visa and Master Card – that might not be a problem for long. New blockchains are being currently developed with the aim of solving the transaction bottleneck.
As for the issue of value fluctuations – where the initial wave of worries about crypto transactions being expensive – crypto markets are stabilizing. And any cryptocurrency that enters widespread use will, by virtue of its widespread use, gain enough stability that day-to-day price changes won’t be huge.
Fairer costs at no cost
Let’s go back to the $1M example, since it’s good to illustrate just how much money you might be losing once all things add up – and let’s be clear: while you might not regularly move a million dollars, the average American moves more than a million dollars through their lifetime.
On the Bitcoin network, known for its scalability problem and slowness, you could move more than a hundred million dollars for the paltry sum of… ten cents.
That’s several orders of magnitude lower than those of a regular bank. As such, some of crypto’s early adopters have taken to performing their large-scale transactions through the blockchain, since whatever they lose from them taking longer, they more than make up on savings.
Not that they always take longer. Transactions inside a same bank are instant, but between banks – or countries – aren’t anyway.
The point is, using crypto you can go from 1% transaction fees to 0.01% fees.
Only one drawback…
While banks use percentages to calculate transaction costs, cryptocurrencies use a more lineal approach, usually tied not just to the amount of money but also to the current state of the blockchain.
This means charges move between smaller amounts, but depending on the blockchain they might have minimums to be paid. Over the Bitcoin blockchain, for example, the minimum amount for a transaction is ten cents.
This means that you might be able to move a hundred million for that much… but if you spend $5 on crypto for an ice cream, it’ll cost you that much, too.
Thanks to this, for now, cryptocurrencies remain a great option – for larger transfers. Their fees vary between ten cents and five dollars. This depends on the blockchain, the amount, and how busy the chain is at the time.
However, this should change. As the scalability problems are solved, transaction costs – and times – should halve. Eventually, we might see small charges for large transactions, and almost nonexistent ones for smaller ones, turning cryptocurrencies into the best way to save money overall.
As for now, the writing is on the wall for many companies: Cryptocurrencies are a way to save money in transactions. Not only that, but they offer an alternative to dealing with regular banks, and can in some cases be faster than regular bank transfers.
It’s due to this that, while cryptocurrencies haven’t yet gained mass acceptation, several important parts of our society are actually dealing with them already. It’s just difficult to argue with a 99% reduction on transaction fees.