This week we dive into Bitcoin, which continues to outperform the broader market. With the Bitcoin halving now less than a year away, we analyze its potential implications.
We also dive into Bitcoin network activity, highlighting how fundamentals appear to be improving just as the halving narrative enters the picture.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin fees rebounded, driven by the number of daily transactions reaching their highest in six years
- Ethereum fees decreased slightly as trading for new meme coins eased, particularly in the second half of the week
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- Bitcoin recorded over $1B in inflows to centralized exchanges this week, many of these coming shortly after fake rumors of Mt. Gox linked addresses moving funds
- $735M worth of ETH left CEXs as staking continues to shift into more decentralized options
Bitcoin Activity Grows as the Halving Approaches
Bitcoin has started 2023 strongly, with its price increasing by 78% and improving network activity. Additionally, the awaited Bitcoin reward halving is now less than a year away, fuelling both event-driven traders and fundamentals investors.
Halving-Led Cycles? It has been claimed by many that Bitcoin’s 4-year reward halvings are a main catalyst for crypto bull cycles
- The amount of BTC awarded to miners every block is on track to drop from 6.250 to 3.125 on April 2024
- Despite Bitcoin’s decreasing distribution being scheduled since its inception, the Bitcoin halving has aligned roughly with bull markets
- Since miner rewards currently account for just ~0.10% of daily Bitcoin volume, the bullish consensus surrounding the halving is likely to play a larger factor on its price than the actual reduction in issuance
Psychologically, many investors have now come to associate this event with Bitcoin price appreciation, and given how it has seemed to have work in the past three halvings, there is reason to believe that people will try to anticipate the narrative. This pattern may have already started as reflected on increasing search interest earlier on the year.
The positive outlook surrounding issuance reduction can also be seen through Litecoin’s upcoming halving.
Litecoin Holding Up — LTC has been one of the top performing layer 1 assets over the past year
- Litecoin’s miner rewards are set to decrease by 50% in less than 100 days
- Being a Bitcoin fork and dubbed as “digital silver”, Litecoin’s reaction to the halving could provide interesting insights with regards of what to expect with Bitcoin’s 2024 halving
If history rhymes, Bitcoin’s halving is likely to drive further interest from speculators. In addition, improving fundamentals may also be attracting investors.
Transactions Six-Year High — The 7-day average of daily Bitcoin transactions is currently at its highest since December 2017
- The number of Bitcoin daily transactions is up by over 60% in 2023, accelerating shortly after the introduction of Bitcoin NFT-like inscriptions
- Well-known NFT projects like Bored Apes and DeGods have embraced Ordinals, with both launching collections on the Bitcoin blockchain
- Increasing number of daily transactions suggest growing active usage of the Bitcoin blockchain
Bitcoin ordinals have also contributed towards miners being less reliant on block rewards.
Improving Outlook for Bitcoin Security
While Bitcoin’s halving is typically viewed as the mechanism insuring BTC scarcity, it is also worth noting that it decreases the blockchain’s “security budget”. As the amount of Bitcoin issued rewarded to miners decreases, they theoretically have less of an incentive to contribute their resources to validate the network.
Hence, for Bitcoin’s security to be long-term sustainable, transaction fees should make a higher percentage of the rewards earned by miners.
- Throughout 2022, Bitcoin transaction fees made up just 1.61% of the revenues generated by Bitcoin miners
- This has increased to 2.76% on average over the last week, reaching its highest level since July 2021
- The growing share of transaction fees is improving Bitcoin’s security outlook by reducing miners’ reliance on block rewards
Overall, Bitcoin is seeing a confluence of positive indicators. Though one year in advance may seem like a long anticipation for Bitcoin’s halving, its historical significance could contribute to this narrative heating up.
This is also complemented by growing network activity. While this may not necessarily reflect on Bitcoin’s price near-term, Bitcoin fundamentals align positively with the much-awaited halving.
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