Having a Bitcoin transaction stuck in the mempool for the last 24 hours got me thinking about why the price continues to increase (in USD terms) when Bitcoin is currently demonstrating a complete lack of utility value.
First let me explain what the mempool is – please skip this paragraph if you already know. When a Bitcoin transaction is broadcast to the network, each Bitcoin miner adds it to a memory pool of pending transactions that are available to be mined into a block – the so-called mempool. Then all of these pending transactions get swept up into the next block mined at approximately 10-minute intervals. Or that would be the case were it not for the fact that there are often more transactions in the mempool than will fit in a block, hence the Bitcoin scalability and blocksize debate – a topic worthy of an entire article in its own right.
Right now we are seeing quite dramatic mempool growth as transactions are being created at a faster rate than they can be mined. The approximate capacity if the Bitcoin blockchain with the current block size limit of 1MB is about 7 transactions per second with the block time being 10 minutes. Hence the mempool is not being emptied by the mining of each block and is growing, to a record size of 60Mbyte at the time of writing, leaving over 100,000 transactions unconfirmed (including mine). Mempool growth = transaction backlog.
One might think that, given Bitcoin is all about “utility value”, this demonstration of abject lack of utility would have a negative impact on Bitcoin’s price. But the price continues to increase in a mini-bubble right before our eyes, currently at an all-time high of $1183. Of course people attribute the longer term rise of Bitcoin to Chinese flim flam, imminent Bitcoin ETFs, etc. But the mempool growth creates an artificial market imbalance that contributes to price escalation – here’s how:
The current record transaction backlog / mempool size means that whilst people can buy on exchanges immediately, their exchange withdrawals take longer than expected. Meanwhile people cannot get Bitcoin they want to sell back onto exchanges to sell quickly. Thus there is an artificial imbalance between buying (fast and easy) and selling (slow and difficult) which is driving up the price. Given that Bitcoin is all about utility value, that is a little counter intuitive. But if I were a big miner, I would be wanting to do everything possible to make this situation “worse”, or better for the miner who can favour his own transactions and get his block rewards sold at an artificially inflated price.
Blockchain spamming has never been so profitable.