Bitcoin is Eating Itself

Fees keep going up. And every time they go up, more of the money stored on the blockchain becomes worthless.

Over 3000 BTC, worth over $4M, is stored in “coins” (or “utxos”) whose value is too low to be spent in a normal transaction without incurring fees greater than the value of the “coin”.

If fees were back at January 2017 levels, only half as much stored BTC would be worthless. Bitcoin is eating itself.

When you send bitcoin, you destroy some of the coins in your wallet and create new coin(s) for your recipient. All ~16 million existing BTC live in coins that each hold anywhere from 0 BTC to thousands of BTC:

The blue area on this chart is a breakdown of every single BTC in existence by the BTC size of the coins holding them. For example, it’s interesting that more value is contained in coins that hold upper-double-digit amounts of BTC than any other coin size — over 3 million BTC in total. The size scale is logarithmic to deal with the enormous range of coin sizes.

The right boundary of the orange area is set at the current fee level of .0004 BTC. The intersection of the orange and blue areas shows the total amount of worthless BTC. It doesn’t look like much, but the orange area is growing to the right. As it does so, it wipes out the economic worth of all the BTC it encounters.

Here is a zoomed-in view:

When fees reach 500 Satoshis/byte, the tall bar containing 944 BTC will become worthless.

The fee for spending bitcoin doesn’t depend on the amount being sent, but on the size of the transaction data. Fees are now at 200 Satoshi/byte, and a normal spending transaction is deemed to be 200 bytes, so the fee for spending a “coin” is currently 200*200 = 40000 Satoshi, or .0004 BTC. Under these assumptions, a coin holding this amount (or less) is worthless. Virtually all transactions are bigger than 200 bytes, but it’s also possible to add a spend to an existing transaction, which costs less.

There’s a decent chance you own one or more of these worthless coins. If your wallet has a View Coins feature, look for any that hold .0004 BTC or less. The most common way you might wind up with these is as change from a previous payment you made. You can still use this bitcoin (and your wallet might do so without consulting you), but it would be better not to, because you’ll pay more in fees than your recipient will get.

There’s nothing you can do about this situation. The only way those coins will get their value back is for fees to fall. The only way to stop more value from being destroyed is for fees to stop rising.

Some small coins are useful despite being worthless. This is because the transactions that created them were meant for something other than payment. Smart contracts and notarization are examples of these. But most of these transactions control a tiny amount of BTC, often 1 or even 0 Satoshis. Their aggregate value is negligible, as can readily be seen on the first chart.