Written by Jaran Mellerud

This is the third article in our series on Bitcoin transaction fees, where we explore the potential trends and developments in transaction fees over the coming years.

In our previous article, we discussed the historical behavior of Bitcoin transaction fees, characterized by extended periods of low fees punctuated by brief spikes during demand surges. As you will learn in this article, we anticipate that these fee spikes will occur more frequently in the coming years.

Overall, bitcoin is clearly not yet used as a medium of exchange in any significant manner. It is still primarily used as a store of value, with users focused on accumulating bitcoin rather than using it for payments. This usage pattern will likely persist for at least the next five to ten years.

However, the limited usage of bitcoin as a medium of exchange does not preclude the possibility of substantial fee increases during this transition period.

The critical thing to remember is that block space is scarce, with each block containing a maximum of 4 MB of space, which equates to approximately 3,000 transactions. This scarcity has been the cause of the short periods of surging transaction fees over the past few years. It's comparable to the scarcity of bitcoin as an asset, where only a slight increase in demand can lead to a massive price surge, a pattern seen in every bull market.

Interestingly, we are now in the longest period of full blocks in Bitcoin’s history, with blocks being almost completely full since early 2023.

This block fullness is primarily due to the rising popularity of non-monetary transactions, which has resulted in a significant number of non-time-sensitive transactions lingering in the mempool, waiting to be processed. These types of transactions have created a baseload demand for block space, as miners prioritize higher-paying transactions and then use the remaining space for these lower-priority transactions.

The fullness of the blocks means that we are only a small demand increase away from surging fees. This was exemplified by a brief fee surge in early June, caused by the crypto exchange OKX consolidating its UTXOs. Consider this: a UTXO consolidation by a single crypto exchange led to a 15x increase in daily average transaction fees overnight. This demonstrates how easily transaction fees can skyrocket in a market characterized by block space scarcity.

Bob Burnett has frequently discussed the potential for transaction fees to increase, using an analogy that effectively illustrates how scarcity works. He explains it this way: imagine you have an apple tree that can produce 100 apples a day, but only 90 people want apples. In this scenario, the price of apples will be close to free. However, if 101 people want apples, the price starts skyrocketing. If 120 people want apples, the price goes through the stratosphere. He continues by explaining that right now, we are in a period where people want 98 or 99 apples. Thus, it takes very little additional demand for transactions to cause fees to rise enormously.

Due to the block space scarcity and fullness of blocks, it is not unrealistic to expect average fees to be higher in the next few years than the 0.45 bitcoin per block average we've seen in recent years.

I think it will take at least five to ten years before people, businesses, and even countries, start actively using bitcoin as a medium of exchange.

Thus, the largest demand for block space over the next few years is likely to come not from monetary transactions but from non-monetary transactions such as ordinals, BRC-20 tokens, Runes, and other methods. This non-monetary transactional demand will cause fees to periodically surge to new heights, especially during bull markets.

Bitcoin’s transaction fees have always been rising organically during past bull markets due to heightened demand for monetary transactions. What sets the upcoming bull market apart is the potentially explosive combination of organic demand for monetary transactions with the new demand for non-monetary transactions.

If you thought the Rune transaction fee surge of up to 37.7 Bitcoin per block during the halving was extreme, just wait for the next bull market. The demand for these new types of transactions will be enormous. Look at what happened to Ethereum during the 2021 bull market—token issuance, trading, and NFT minting went wild, overloading the blockchain and driving fees to enormous levels.

Just look at the chart above. In 2021, during the bull market, degens paid Ethereum miners almost $10 billion in transaction fees to mint NFTs and trade tokens. While a significant portion of this activity has already moved to Solana, we are now witnessing the emergence of shitcoins running on Bitcoin.

Also, remember that the Bitcoin blockchain has even less space than the Ethereum blockchain. Imagine how high fees could soar when all this speculation moves over to Bitcoin. This will benefit miners but not Bitcoin users. We will likely see massive disputes within the Bitcoin community over fees in the next cycle. Miners will be pleased, but many users will be frustrated.

So, what is my fee prediction over the next couple of years? In the previous bull market, fees more than doubled only due to organic transactional demand from new users. With the average fee being 0.44 Bitcoin per block in 2024, we could expect fees to average around 1 bitcoin per block in 2025 solely due to organic demand for transactions. Adding the coming fee pressure from non-monetary transactions, the average fee per block could very well surpass 3-4 bitcoin per block.

This would be equivalent to around $12 billion in transaction fees per year, which is only slightly higher than what Ethereum achieved in 2021. If such a scenario occurred on Ethereum a few years ago, it is conceivable that it could happen on Bitcoin as well.

While non-monetary transactions will be a big driver of fees in the coming few years, they will eventually be priced out by more organic, monetary transactions.

Large monetary transactions will have a much higher willingness to pay for block space than unimportant non-monetary transactions, and will thus price out the latter. Thus, the data storage activity we are currently seeing emerge will eventually subdue and be almost entirely replaced by monetary transactions.

I hate to admit it, but in 2020 and 2021, I was involved in the DeFi space on Ethereum. I had some fun trading worthless tokens back and forth on the Ethereum blockchain. Then one day, I was forced to pay about $300 to make a single token transfer. At that point, I decided to just sell my entire altcoin "portfolio" for bitcoin.

From my experience as a shitcoin trader, I can tell that very few people are willing to spend massive fees on gambling. These types of market participants are more likely to move over to blockchains like Solana, which offers a low-fee environment for speculative activities.

I think non-monetary transactions will eventually be priced out of the Bitcoin blockchain, but until that happens in a few years, they will provide a nice stream of transaction fees to miners. This serves as a revenue bridge while we wait for monetary transactions and more organic fees to pick up.

In summary, Bitcoin transaction fees are poised to enter a new phase of heightened volatility, driven by a combination of organic demand and the emerging popularity of non-monetary transactions. While these factors will likely lead to periodic fee surges, the long-term outlook suggests that monetary transactions will eventually dominate, pushing out lower-priority transactions.

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