Over the last year bitcoin economic growth has massively outpaced transaction space growth with the result of high transaction fees. In consequence, companies that accept Bitcoin as payment are decreasing which has never previously occurred in a Bitcoin "boom cycle". But today, companies are dropping support for cryptocurrency altogether or moving to lower fee alternatives.

Today, Bitcoin fees hit all time highs requiring 990 sat/byte for next block service which works about to about $30 a transaction. So Bitcoin today is effectively unusable for currency transfers less than $30, as the fee would exceed the value transferred (in practice fee tolerance is much less than the proposed 100% but let's take this optimistic assumption).

The crypto situation is similar to a traditional currency where $30 is the smallest coin denomination. So with that observation we can look at economic history to help understand what is going on.

And in fact, the problems that occur due to a lack of availability of small coin denominations is well known to economic theory since at least the late 1600s. In the late 1600s, England had an issue with low quality coinage -- since the coins were silver, people would clip or shave bits off the sides and melt the bits down to get additional silver. Sir Issac Newton implemented a proposal by Locke to create new gold and silver coins. Unfortunately, the price of the silver metal was worth more than the face value of the coin, so many people hoarded or melted down the silver coins resulting in a tremendous scarcity of "small change" (since the smallest gold coin was quite valuable).

But there is a lack of concrete information online as to what problems this caused, possibly due to the existence of authoritative book format treatments such as "The Big Problem of Small Change" by Francois R. Velde. I may edit this post with more information as I work through the copy I have recently purchased.

But let's put ourselves into 1696 and realize that a quantity of silver coin could pay for a single economic transaction in a single moment (say, a meal). But then the innkeeper would not instantly run out and spend the money so that piece of silver is in a practical sense only able to be involved in a finite number of transactions per month (commonly termed "monetary velocity"). There simply cannot be more transactions in an economy than there are coins divided by velocity. The economy simply runs out of physical money!

One of the common "newbie" questions about Bitcoin is "how will a non-inflationary currency cover economic growth?" And our answer has always been that the value of a bitcoin will simply increase, and that a single bitcoin is divisible into 100 million satoshis so we will always have enough "small change" liquidity. This view was still being expressed as recently as july this year ( https://bitcoin.stackexchange.com/a/56777/31191 )

But this question and answer makes a fundamental miss-assumption from the days of physical coin. And that assumption is that all these little bits of bitcoin can be independently used in economic transactions.

But coin divisibility does not matter for Bitcoin liquidity. What matters is the block size. The block size puts a limit on the number of the number of economic transactions per day -- about 300,000, although this number will increase a bit as segwit is slowly adopted.

Adam Back (Blockstream CEO) recently infamously suggested that people use the equivalent of a bitcoin bar tab, which is eerily reminicent of the Duke of Beaufort's observation in 1696:

...at this time all money is refused unless it be new money or very broad, of which there is but little stirring. I was forced to enter my name in a book to pay for my dinner

This works temporarily because money is actually a form of memory . But memory was replaced by money for very good reasons.

Let me end with quotes about England's 1696 liquidity crisis:

First, from an article more focused on a particular player in the England's 1696 recoinage ( link ):

...and a further 9,174,220 troy ounces of silver was removed from English coin for export purposes. (Quinn, 1996) In this way the clipping of the silver coin of England went from a minor problem to one that threatened to undermine the entire English economy.

The New York fed has this to say about the time period ( link ):

In the second half of 1696, England’s economy essentially stopped, and the ensuing monetary contraction led to massive unemployment, poverty, and civil unrest.

These phrases " ...threatened to undermine the entire English economy " and " ...economy essentially stopped... " should be a very worrisome for holders of Bitcoin.