Mining: Bitcoin Transaction Fees Surpass Block Rewards for the First Time Since 2017

Stablecoins: Tether Boosts T-Bill Holdings, Cuts Banks Exposure

Payments: PayPal’s crypto holdings increased by 56% in Q1 2023 to nearly $1B

ETH: Ethereum’s Vitalik Buterin May Get His Way on Ether Supply Cap — 5 Years Late

Exchanges: Binance.US Plans to Cut CZ’s Stake to Gain Favor With Regulators: Report

Digital asset markets broadly sold off throughout the past seven days, dropping back toward a market cap of roughly $1.1 trillion on Friday morning. It is difficult to identify find culprits for this decline, since equity markets have been relatively tame and Fed Funds futures continue to point toward an imminent pause in rate hikes by the Federal Reserve, but recent weakness in crypto markets may be most closely related to negative sentiment swirling around Bitcoin’s (BTC) surging transaction fees.

As MRP noted in last week’s Crypto Wrap, the number of daily BTC transactions surged beyond 682,300 last week, more than 190,000 greater than its previous peak during the top of the 2017 bull run, and setting a new all-time high. More transactions will typically result in more revenue for miners in the form of fees. Per CoinDesk, the average transaction (often shortened to tx) fee on the Bitcoin network had jumped to $7.25 (equivalent to 0.00027 BTC at current prices), the level highest since July 2021. Earlier this week, that figure exploded to $19.20 (0.00073 BTC), with over 440,000 Bitcoin transactions pending confirmation in the mempool. The mempool is essentially Bitcoin’s “waiting room” for transactions that have not yet been confirmed and included in a block.

As previously noted, this surge in transactions and fees will surely be a meaningful short-term boost for miners. However, the same cannot necessarily be said for the average user of the Bitcoin network. Without getting too far into the weeds of the BRC-20 “ordinal” trend that has been a key source of the recent congestion, it’s important to explain exactly why transaction volume pushes up network fees.

The tx tsunami has begun to ease over the past 24 hours, as the number of pending transactions has been whittled down to about 305,000 and Mempool.Space’s interface indicates fees for high priority transactions are now down to $4.00. Fees are mainly a way to compensate miners for the work that they are expending, but they also serve as a barrier to spam in the network. Though Bitcoin transaction fees are largely at the discretion of users who want to send a payment, those who include the highest fee typically get the highest priority from miners, who decide which transactions get into a block and when. Naturally, some transactions are more time sensitive than others while others are more cost sensitive. Additionally, only so many transactions can fit into a single block, and new blocks can only be added to the chain of previous blocks by miners once every ten minutes. Bitcoin processes a maximum of about seven transactions per second and, when the mempool is filled up with several hundred thousand transactions, it’s not hard to imagine how difficult it can become to clear the traffic with new transactions constantly piling on.

When Bitcoin gets congested with pending transactions, which then become increasingly expensive, it begins to raise questions about the scalability of the network among investors, particularly those who are looking toward a future of global adoption. It’s this question that has likely pushed Bitcoin’s per unit price in USD terms from highs above $29,700 last Friday to just $26,400 this morning, a decline of -11.1%. It’s important to note that Bitcoin was not built to be “fast” or “instant” in the way that it processes transactions. Rather, Bitcoin is meant to be secure and resilient to attempted attacks against its blockchain ledger. Moreover, many would argue that Bitcoin is only a “base layer” for on-chain settlement and not all transactions need to be conducted on that layer. So-called “layer two” implementations like the Bitcoin Lightning Network can reduce costs by taking many transactions, particularly smaller ones, off-chain into a fully collateralized network of payment channels. The Lightning Network’s capacity surpassed 5,400 BTC ($143.1 million) earlier this year while base fees are worth just fractions of a cent.

There have been previous attempts to speed up Bitcoin by increasing the block size from 1 megabyte (MB) to as much as 32MB. These attempts were criticized as a threat to decentralization, as larger blocks could raise the bandwidth and CPU cost of operating a Bitcoin node. Big block efforts failed to garner the support of miners and nodes required for implementation on Bitcoin, which resulted in a hard forking of the blockchain, and the creation of an offshoot cryptocurrency known as Bitcoin Cash (BCH) in 2017. If the market is to be the judge, the Bitcoin’s original block size is the clear victor thus far, as BCH’s market cap is worth only $2.2 billion – just a fraction of BTC’s $512.0 billion market cap.

February 22, 2023: Ethereum May Face Contagion from SEC Crackdown on Crypto Exchanges’ Staking Services →

February 14, 2023: Staking Services and Stablecoins in SEC Crosshairs as Crypto Industry Preps for Court Battles →

January 24, 2023: Bitcoin Mining is Back to Profitability, Hash Ribbon Shows Peak Capitulation May Have Finally Passed →

October 18, 2022: Fallout From Ethereum “Merge” Bolsters Bitcoin’s Hash Rate as Some Criticisms Still Linger →

October 7, 2022: Ethereum’s Post-Merge Era Conquers Key Goals, Yet Centralization and Regulation Concerns Linger →

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