May 5, 2023
Greg Cipolaro

Research Weekly - Bitcoin’s Backlog is a Benefit to Miners


  • Why a backlog of bitcoin transactions is a benefit to miners.
  • More bitcoins are being held for longer. We look at the implications.
  • The Fed raises rates again, threatening to prolong the banking crisis.

A Backlog in Transactions is a Benefit to Miners

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.

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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.

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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.  

More Bitcoins Are Being Locked Away for Longer

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.

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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.

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Rising Rates Likely to Keep the Heat on Banks

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.

Market Update

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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%.

Important News This Week


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

Regulation and Taxation:

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

New York Financial Regulator Fines Crypto Exchange bitFlyer USA $1.2M for Not Meeting Cybersecurity Requirements - 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

Upcoming Events

May 10 - CPI release
May 18 - Bitcoin 2023 Conference in Miami
May 26 - CME expiry

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