Insight
May 5, 2023
A new project has gained popularity on Bitcoin’s blockchain, resulting in an explosion in transaction fees. The “BRC-20 Experiment”, a reference to Ethereum’s popular ERC-20 standard that defines tokens issued on the network, is a technique for issuing other digital assets natively on the Bitcoin blockchain using Ordinals. Token functions, such as defining, minting (creating), and transferring BRC-20s are all achieved by inscribing data into satoshis, the smallest divisible unit of a bitcoin. While Ordinals have been synonymous with digital art, what people often think of as NFTs, the inscriptions appear as strings of text in JSON format (JavaScript Object Notation). These strings define the operations users wish to perform, like transferring a BRC-20.
BRC-20s have exploded in value since the project launched less than 2 months ago with over $177M in aggregate value. This growth has led to a frenzy in transaction activity which is having a noticeable impact on Bitcoin’s blockchain. The increased demand for on-chain activity can be seen in the mempool, the waiting room for unconfirmed transactions, which has shown a growth in size and fee rates (sats/vByte). As transactional demand increases, users must pay higher fee rates for their transactions to be included by miners.
This increased network congestion might come at a cost to users through longer wait times and higher fees, but it has been a benefit to miners, whose fee revenues have jumped significantly over the past week or two. When Ordinals launched in mid-January, we observed rising transaction fees, but the recent BRC-20 craze has taken fees to another level. It is important to note that miners still generate the bulk of their revenue from the block subsidy rather than transaction fees, but the mix of miner revenues that comes from fees recently jumped from 2%-4% of revenue to over 10% with the jump in BRC-20s.
While BRC-20s have proven popular in just a short time, their staying power is not yet clear. At a minimum, however, their popularity continues to fuel the entrepreneurial and creative energy across the Bitcoin ecosystem, unlocked initially with the launch of Ordinals.
Bitcoin owners continue to hold more bitcoins for longer according to blockchain analysis. The share and absolute number of coins that have not moved in a year or more are near or at all-time highs, respectively. The share or percentage of bitcoins that have not moved is over two-thirds of the total supply, amounting to 13.1M of the 19.4M bitcoins that exist today.
The growing trend of investors holding strongly indicates the changing attitude toward bitcoin ownership. While short-term price movements and the trading of bitcoin often grab the headlines, the reality is that bitcoin is increasingly being used as a buy-and-hold asset, as evidenced by blockchain data. This is something we have long advocated for and explored in our research piece, “The Adverse Impacts of Market Timing.”
There are some important second-order impacts of this dynamic. With more bitcoins being held for longer, a dwindling supply is available for short-term trading. This may result in increased volatility, something we noted last week we haven’t seen yet, or increased trading costs through wider spreads, something we have seen. Given bitcoin’s fixed supply nature, this also means that fewer bitcoins are available for others to purchase. This may result in upward pressure on prices if the demand for bitcoin grows.
One final takeaway, there appears to be a cyclical price component associated with this secular growth in long-term holding. Long-term holding tends to rise through price drawdowns and the early phases of a bull market. The middle to late stages of the bull market then results in a decline in long-term holding as holders sell and realize profits. Given that long-term holding continues to rise, we think this is a positive indicator that we are still in the early stages of a bull market.
This week, the Fed Open Market Committee (FOMC) raised the target funds rate by 25 bps. The move itself was not controversial but the press release, which is heavily scrutinized for deletions and additions, continued to assert the “US banking system is sound and resilient.” Perhaps the Fed doesn’t want to be seen as alarmist, but this statement seems at odds with reality. Just two days prior, we saw the 11th-hour acquisition of First Republic Bank by JP Morgan, making it the fourth such takeover, wind down, or receivership of the ongoing banking crisis. By deposit base adjusted for inflation, the current regional banking crisis of 2023 has already eclipsed the Global Financial Crisis of 2008.
The unfortunate byproduct of the rapid rise in rates put forth by the FOMC over the past 14 months has been a buildup of unrealized losses in the assets held by banks. It is reasonable to view the Fed’s desire to stamp out inflation, along with ill-preparedness on the part of banks for the rising rate environment, as significant factors in the banking crisis.
The bitcoin price was down 2.6% on the week as the price continues to struggle around the $30K level. The ongoing banking crisis continues to fuel interest in the asset class while the prospects of regulatory enforcement continue to drive some investors on the sidelines. Stocks were down on the week as the ongoing banking crisis weighed on investor sentiment. The S&P 500 fell 1.8% and the Nasdaq Composite fell 1.4%. Gold had a good week, up 2.8%, another beneficiary in the low trust in the banking system and fiat currencies. Oil plummeted 8.3% this week, even as OPEC cut supply, as investors fret about the prospects of a recession and economic growth. Bonds were mixed with investment grade corporate bonds up 0.2%, high yield corporate bonds down 0.5%, and long-term US Treasuries up 0.7%.
Bitcoin Climbs as US Bank Failure Bolsters Crypto Narrative - Bloomberg
Bitcoin BRC-20 Token Standard Becomes a New Destination for Meme Tokens - Cointelegraph
The Kingdom of Bhutan Has Been Quietly Mining Bitcoin For Years - Forbes
Attorney General James Proposes Nation-Leading Regulations on Cryptocurrency Industry - NYAG
The DAME Tax: Making Cryptominers Pay for Costs They Impose on Others - White House
Crypto Exchange Poloniex Agrees to $7.6M Fee to Settle Sanctions Violation Charges - CoinDesk
U.S. Court Orders SEC to Respond to Coinbase's Allegations Within 10 Days - CoinDesk
Introducing Coinbase International Exchange - Coinbase
Introducing Gemini Foundation — A Non-US Crypto Derivatives Platform - Gemini
Fedi Raises $17M in a Bid to 'Accelerate the Adoption of Bitcoin and Lightning' - Decrypto
May 10 - CPI release
May 18 - Bitcoin 2023 Conference in Miami
May 26 - CME expiry
This report has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This report does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively NYDIG).
It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this report.
The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this report may contain forward-looking statements regarding future events, targets or expectations. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this report, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
Information furnished by others, upon which all or portions of this report are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions that occur subsequent to the date hereof.
Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the information set forth herein. By accessing this report, the recipient acknowledges its understanding and acceptance of the foregoing terms.
