MoonXBT, a global crypto-social trading platform headquartered in the Cayman Islands, announced on Saturday that it has introduced a zero-fee policy on multiple trading pairs for the spot market to lessen the burden of the retail customers exposed to the bearish market.
The platform said the zero-free policy would run indefinitely until further official notice is announced by the firm. MoonXBT stated that it has eliminated transaction fees for many crypto trading pairs including BTC/USDT, ETH/USDT, BNB/USDT, ADA/USDT, and XRP/USDT.
The exchange mentioned it is considering adding more trading pairs to the no-fee list in the future based on how users react to the current zero-fee policy. All users will enjoy zero-fee transactions for both maker and taker orders without trading volume requirements or other pre-conditions, the firm said.
George Lee, the Chief Operating Officer at MoonXBT, talked about the development: “In spite of the fact that our trading volume is moderate compared to Binance or others, we have reserved enough power to handle the current market situation. No matter if it’s a temporary correction or a bearish period, we want to take measures to make sure our users can cope with this phase together with our platform. We also want to make it easier for new users who want to try crypto investing during a relatively quiet time.”
Apart from that, MoonXBT has also introduced mental support services to help users to cope with the trading hardships. Users can take advantage of the social trading platform’s community forum to exchange views and share strategies to discover effective ways to manage the market and lessen fears and anxieties.
MoonXBT also said it is developing new products designed to potentially hedge the crypto downturn. Furthermore, the social trading platform said it is looking into new business sources, new partnerships, and new pricing models to offer consistent benefits to users while making the exchange sustainable.
Lastly, MoonXBt said it has prepared 10,000 USDT for an airdrop to enable upcoming new users to collect free money in cryptocurrency airdrops.
Price War Sets In
MoonXBT’s zero-fee policy comes after Binance exchange recently introduced its zero-fee trading for Bitcoin transactions.
Early this month, Binance.US started offering zero-fee trading to all new and existing users to trade Bitcoin against the US dollar, Tether, USD coin, and BinanceUSD. The announcement by Binance.US, during that time, brought several stocks like its rivals, including Coinbase, Robinhood Markets, among others, down.
The move, which came amid a crypto winter that has prompted several major crypto firms to announce massive layoffs, also signals the beginning of a price war and a potential consolidation of the industry.
The move is set to increase pressure on other crypto exchanges to lower trading fees as competition heats up.
Network congestion on the Ethereum network is a very real and present issue, which has in turn brought about more real and pressing issues. Users of the network, especially small-time investors, have drawn the short end of the stick with these issues as they are the most affected. With fees skyrocketing, carrying out small transactions on the leading smart contracts network is becoming less and less feasible with each passing day.
The high fees and congestion have sparked discussions on how it can be eliminated. There are various developments in the pipeline, like the Consensus Layer (formerly known as ETH 2.0) and other suggestions made by developers. This time around, it is atheneum’s founder Vitalik Buterin, proposing a way to deal with the network congestion, and by extension, the high fees, on the network.
Blob-Carrying Transactions On Ethereum
In a conversation that was posted to popular social media platform Twitter, Vitalik Buterin and developer Tim Beiko put forward proposals that would help address the issue of high network congestion. With the adoption of the network growing at a rate not even anticipated by the creators themselves, it has now become a race to find the best way to properly scale the network. Here is where Buterin proposes a new feature called “blob-carrying transactions.”
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Related Reading | Solana And Ethereum Recover After Registering Double-Digit Gains
This feature would be added to a hard fork that would take place in the near future, explains Buterin. Blob-carrying transactions would allow for higher scalability for rollups in the meantime before the complete move to the consensus layer. It is basically a stopgap until sharing is implemented on the network. This new feature would be connected to both the Beacon block and the consensus nodes that are coming to the network.
Some proposals to add “blob-carrying transactions” in a near-future hard fork, bringing higher scalability to rollups before full sharding is complete. https://t.co/oRTSwAC1oD
— vitalik.eth (@VitalikButerin) February 5, 2022
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“This EIP provides a stop-gap solution until that point by implementing the transaction format that would be used in sharding, but not actually sharding those transactions,” the founder said. “Instead, they would simply be part of the beacon block and would need to be downloaded by all consensus nodes (but can be deleted after only a relatively short delay).”
When Is This Coming?
The blob-carrying transactions could possibly be deployed with the Shangai hard fork. It would provide a solution to mempool issues that continue to rock the network. Additionally, a solution for blob transactions and normal transactions that carry a large amount of data would be to “increase the minimum increment for mempool replacement from 1.1x to 2x, decreasing the number of resubmissions an attacker can do at any given fee level by ~7x,” the notes read.
ETH settles above $3,000 | Source: ETHUSD on TradingView.com
Ethereum still remains the network with some of the highest fees in the space. It is reported that fees can go as high as $300 in some cases when the network is clogged due to a high-profile NFT minting. Even the Layer 2 rollups that have been developed to help users deal with the high transaction fees have seen their own fees steadily increase as they are unable to accommodate demand.
Related Reading | TA: Ethereum Smashes Heavy Resistance: Next Bullish Levels Traders Should Watch
On the price side, Ethereum is doing well as it continues to follow closely the price of bitcoin. Both digital assets went into the weekend with bearish prospects and emerged on a bull trend, seeing ETH’s price breaking above $3,000 once again.
Featured image from Nairametrics, chart from TradingView.com
Bitcoin’s friendliness in terms of the low transaction fees paid to use its network continues because it hit a monthly low. Market insight provider Glassnode acknowledged:
“Total fees paid (7d MA) on the Bitcoin network just reached a 1-month low of 0.427 BTC.”
The previous monthly low was observed on Christmas day.
On the other hand, the BTC hashrate has been trending upwards, given that it recently attained a record-high. Glassnode added:
“Bitcoin hash rate has reached 183 Exahash, a new all-time high. After a -54% reduction in May 2021 resulting from a ban in China, mining rigs have returned to operation, growing network security by +117% since July.”
Market analyst Will Clemente opined that the Bitcoin network was presently more secure than ever before based on the recovery made by the hashrate following China’s crypto mining ban.
Chinese authorities made it clear that crypto mining was unwelcome on Chinese soil in May 2021. As a result, BTC miners were left with no choice but to shut down operations and relocate elsewhere, a move that made Bitcoin shed off more than half of its value by plummeting to lows of $30K.
Furthermore, the hashrate on the BTC network was nosedived by more than 50%.
The hashrate is used to measure the processing power of the BTC network. It allows computers to process and solve problems that enable transactions to be approved and confirmed across the network.
Meanwhile, more participants continue to join the Bitcoin ecosystem, given that the number of BTC addresses holding more than 0.1 coins recently reached an ATH of 3,309,387.
Furthermore, Brazilian city Rio de Janeiro revealed plans to become “Crypto Rio” by having 1% of its reserves in Bitcoin.
“Network Revenue rose 1,777% from $231.41 million to $4.34 billion. Of this, $3.78 billion (87%) worth of ETH was “burned” and removed from the circulating supply through EIP-1559.”
Network revenue entails the fees paid by users to utilize the Ethereum network.
Furthermore, the average daily active addresses rose by 35% from 425,636 to 572,700 during the same period, signalling that more participants joined the ETH ecosystem.
On the other hand, the inflation rate was downtrend from Q4 2020 to Q4 2021. Bankless acknowledged:
“ETH Inflation Rate fell 64% from 1.13% to 0.46%. This tracks the increase in the supply of ETH, less burnt fees, as a result of the block reward issued to miners as compensation for confirming transactions.”
A recent study by crypto service provider LuckyHash pointed out that the inflation rate would enter the negative zone if Ethereum 2.0 were fully upgraded, hence prompting a 1% annual deflation rate.
Ethereum 2.0, also known as the Beacon Chain, which seeks to transit the network to a proof of stake (PoS) consensus mechanism from the current proof of work (PoW), recently reached a new milestone with a deposit of more than 9 million Ether.
Nevertheless, the challenge of high gas fees on the ETH ecosystem continues to be evident because the average transaction fee jumped by 557%, from $4.09 to $26.89, as disclosed in the quarterly report.
Meanwhile, a recent poll undertaken by Vitalik Buterinrevealed that Cardano (ADA), Bitcoin (BTC), and Solana (SOL) were the most preferred Ethereum substitutes.
Person-to-person bitcoin exchange LocalBitcoins has announced it has cut down some fees on the platform to zero.
Bitcoin exchange LocalBitcoins has announced that deposit fees and transaction fees between wallets in the platform are now free. Launched in 2012, the platform doesn’t touch fiat currency itself; users can transact with each other leveraging the platform that only intermediates the process – introducing sellers to interested buyers.
Initially, LocalBitcoins became very popular because the platform was more lenient on identity-verification procedures since it doesn’t transfer money itself. Users could also go further to buy bitcoin anonymously through cash trades, where buyer and seller would meet on a local, public space – hence the platform’s name.
However, LocalBitcoins has changed dramatically in recent years, arguably losing its go-to status for anonymous bitcoin transactions. In March 2019, the exchange released a statement saying that it would abide by new regulations in Finland, where it is based, and require users to verify personal information. The new rules, which would come into effect in November 2019, included four individual account levels per trade and BTC volume, requiring the verification of the source of funds in some cases.
Later that year, in May, LocalBitcoins banned Iranian users from the platform and withdrew all services from Iran. In June, the exchange further limited user ability to retain privacy by stopping customers from making in-person trades of bitcoin for cash. Finally, in August, LocalBitcoins strengthened its KYC requirements, even more, losing credibility in the anonymous bitcoin trading space.
However, the platform remains important for other use cases worldwide. In Nigeria, for instance, the central bank (CBN) attempted to restrict BTC trading by banning regulated institutions from dealing with bitcoin in February 2021. However, a few months after that, the country experienced an increase in bitcoin activity, with peer-to-peer BTC trading volume rising by 27% in Nigeria. But it isn’t clear how much of that came from LocalBitcoins.
Some crypto pundits believe that Ethereum could knock Bitcoin off from its first position and eventually become the first largest cryptocurrency market cap.
However, the Ethereum network has been facing serious issues that needed urgent solutions. In May, the average transaction fees on the network soared above $70, thus making the crypto unsuitable for daily retail use.
The London hard fork update to the Ethereum blockchain is highly anticipated to address Ether’s high transaction fees.
The update is expected to occur on August 4. The event will begin Ether’s transition from proof-of-work to proof-of-stake, a less energy-intensive consensus mechanism for transaction validations.
Konstantin Anissimov, Executive Director at CEX.IO, talked about the development and stated that the London hard fork could significantly change Ethereum’s price and adoption. He further explained that the hard fork is anticipated to make Ether less inflationary and help prepare the launch of Ethereum 2.0 in time to come.
“In my opinion, Ethereum will recover to $2,300~$2,500 in the lead up to the hard fork and surpass $3,000 in evaluation by the end of August, provided we do not see drastic governmental intervention in the form of cryptocurrency bans or hard-hitting rules and regulations,”
Although Giacomo Arcaro, an entrepreneur at Growth Hacker, said that Ether’s value could rise in case the hard fork proves itself to be valuable, he cautioned that “It’s also possible that this shift is effectively already ‘priced in.”
Adam Todd, Founder and CEO of Blockster, said that industry experts expect the London hard fork update to see about 20% to 30% ETH’s transaction fees reduction. He, however, had a different view, saying that a reduction in Ethereum transaction fees would not materialise so much, especially “when peak volumes go through.”
“Those betting on substantial fee cuts or an ETH price hike will likely end up disappointed,”
The London hard fork is part of the crypto’s final stages before the release of Ethereum 2.0. The launch of the London hard folk faced delays, and its previous release date this month was rescheduled to take place on August 4.
Ethereum As Global Blockchain Of Choice
Ethereum has attracted several global financial institutions because it remains the gold standard for blockchain-based and smart contract applications. If institutional investors release that the London hard fork positively impacts Ethereum’s long-term evolution, then the crypto asset price would rise.
The London upgrade is a long-awaited update in quite some time and will follow the recently implemented Berlin hard fork. The London hard fork is planned to complement the Ethereum 2.0 transition, changing the Ethereum chain from proof-of-work to proof-of-stake.
The biggest changes being introduced to the Ethereum blockchain include five Ethereum Improvement Protocols (EIPs), majorly EIP-1559, EIP-3554, and EIP-1559. Of course, EIP-1559 is poised to change Ethereum’s transaction fee rate to a new scheme that makes the cryptocurrency deflationary.
Learning Bitcoin With Charts: How Are Hash Rate, Difficulty And Fees Related?
Date: May 15, 2021
Bitcoin’s difficulty adjustment mechanism is one of its most important aspects, but learning how it works can be a daunting task. This article leverages on-chain data to visualize how this mechanism works and how it relates to hash rate, block intervals, transaction fees, and the mempool. After reading this article, you will have a better understanding of why at certain times using Bitcoin may appear to be relatively slow and expensive, but also how Bitcoin fixes this and why this process is so essential to ensure Bitcoin’s monetary properties.
Bitcoin’s Supply Issuance Schedule
If you have heard of Bitcoin, you have probably heard that its supply is hard capped at 21 million units (BTC), making it a perfectly scarce asset and thus the ultimate “hard money.”
When Bitcoin was created, miners received 50 BTC for each new block as a reward for their work. The software has a built-in rule that after every 210,000 blocks that are mined (approximately every 4 years, if the block interval is 10 minutes), this “block subsidy” is cut in half during an event called “the halving.” During this first “reward era”’ which ended November 28, 2012, 10.5 million BTC were mined — half of its maximum supply. During the second reward era, half of that amount (10.5 million / 2 = 5.25 million) was issued, followed by half of that (5.25 million / 2 = 2.625 million) during the third reward era — and so forth. After 32 halvings, the block subsidy equals the smallest unit in Bitcoin (0.00000001 BTC = 1 sat) and cannot be split after, which means the block subsidy falls away completely after that (believed to be in the year 2140, if block intervals were 10 minutes during its entire existence). The first 14 reward eras of Bitcoin’s issuance schedule are visualized in figure one.
The careful reader will have noticed that in the previous paragraph, we mentioned twice that the actual calendar dates on which these halving events occur depend on the block intervals and that we assumed 10 minutes here. Why is it important that this supply issuance schedule is predictable in regular calendar-times in the first place?
The Importance Of Relatively Stable Block Intervals
Let’s consider what it would look like if Bitcoin didn’t have a built-in difficulty adjustment mechanism, but simply had a fixed mining difficulty.
If that fixed difficulty had been set relatively high, early mining would have been very expensive and blocks would have come in at a very slow pace early on. Clearly, that wouldn’t have been ideal to bootstrap a new network and could have meant that it never succeeded in the first place.
On the other extreme, if the difficulty would have been set relatively low to incentivize early network participants to join, block intervals would have gotten smaller as more miners joined the network, and blocks would have come in at an increasingly quicker pace. It would have quickly run through its entire supply issuance schedule. Had this happened, the Bitcoin network likely wouldn’t have had enough time to develop the block space market needed to sufficiently incentivize miners to keep mining blocks in order to process transactions and secure the network after the block subsidy had run out.
To summarize, relatively stable block intervals are needed to spread out Bitcoin’s supply issuance over time, which in turn is needed to incentivize miners to keep joining the network over a relatively long bootstrapping period, as well as to gradually develop a block space market that will be able to keep the lights on after the block subsidy reward runs out.
To guarantee that block intervals will remain relatively stable over a multi decade period, Bitcoin has a difficulty adjustment mechanism. As can be seen in figure 2, even with this built-in difficulty mechanism, its block intervals were not very stable, averaging much longer than 10 minutes per block during its first year of existence. The block intervals became more stable after Bitcoin set its first market price in July, 2010, and have been relatively stable at just under 10 minutes for over five years now (no structural up or down trends in the orange line in figure 2) – works like a charm.
Bitcoin’s Difficulty Adjustment Mechanism
To mine bitcoin, miners use highly specialized computers to basically guess a certain number (slightly simplified explanation). When a miner finds the number that the network is currently looking for, that miner earns the right to create a new block on the Bitcoin blockchain, take its block subsidy, choose which transactions to include in that block, and collect the fees of those transactions. At the time of writing, all miners that are active on the Bitcoin network are estimated to have a total capacity (hash rate) of 170 exahashes per second (EH/s), which is 170,000,000,000,000,000,000 hashes per second.
In Bitcoin’s first year of existence (2009), it was still possible to mine Bitcoin on the Central Processing Unit (CPU; which is basically the central chip in a computer that takes care of lots of things) of an average consumer computer, as the network’s hash rate was just a few million hashes per second. Over time, more computers joined the network and eventually chips that were better at heavy number crunching via their Graphics Processing Unit (GPU), the chip in a computer that is applied for graphical tasks and linear algebra) or even hardware custom made for Bitcoin mining (an ASIC, or Application Specific Integrated Circuit) was used.
As you can imagine, as the network’s hash rate increased by a multi-trillion-fold from that first year until now, it was necessary to make it a lot harder to guess that certain number to ensure relatively stable block intervals of approximately 10 minutes each
In Bitcoin, “difficulty” is the measure for how hard it is to find that number that the network is looking for. Every 2,016 blocks (14 days if block intervals are 10 minutes), the Bitcoin software basically calculates the block intervals during that period and adjusts the difficulty so that at current capacity, the average block interval will be roughly 10 minutes again.
The interplay between Bitcoin’s difficulty (the 14-day moving average of the) hash rate and block intervals over the last three months is visualized in figure 3. During the first visualized difficulty adjustment period (the red column on the left), the hash rate was declining (downtrend in black line). As network capacity decreased, block intervals increased (uptrend in blue line), making it necessary to decrease the difficulty (small drop in orange line after this period).
In three difficulty adjustment periods after (first green column in figure 3), the hashrate was increasing again, blocks came in faster than planned and difficulty adjusted upwards three times. Mid-April, 2021 (right red column), there was a large power outage in China that caused a massive drop in Bitcoin’s hash rate, slowing down blocks a lot and making a huge downwards difficulty adjustment necessary after the period. After this happened (right green column), the power outage itself was solved and the downwards difficulty adjustment made it much easier for miners to create blocks again. As a result, some miners with less efficient hardware and/or more expensive energy could earn a profit mining again, actually overcompensating the previous loss of hash rate, actually sending it to new all-time highs.
This latest hash rate drop and recovery is a good example of why miners leaving the network does not have a cascading effect of more miners leaving the network (sometimes called the “mining death spiral” by critics), but the software simply increases the remaining miners’ profit margins, incentivizing other miners to (re)join the network.
A side effect of this mechanism that we all feel is its impact on transaction fees. During times when the hash rate increases and blocks are coming in faster than planned (green columns in figure 4), transactions can relatively easily be included in blocks. Since this means that there are less transactions queued up in line (in Bitcoin called the “mempool”) to be included in upcoming blocks, transaction fees can be relatively low.
The opposite is true during periods where hash rate drops and block intervals increase (red column in figure 4). When blocks are coming in slowly, the queue of transactions waiting to get included gets crowded, and people need to bid up their transaction fees to basically jump the line. As such, transaction fees spike especially when the network capacity decreases (hash rate drops) and is waiting to be bailed out by the next difficulty adjustment.
In this section, we discussed the fees of transactions that were included in blocks. For those looking to transact on the Bitcoin network, it is even more relevant to get a feel for how much all of the transactions that are still waiting in line to be included in future blocks are bidding for their needed block space.
As briefly mentioned above, the Bitcoin mempool can be interpreted as the total of all transactions which were broadcast on the network but are still waiting in line to be included in a future block. Technically, each of the thousands of Bitcoin nodes on the network has its own mempool, but since they are mostly well interconnected, visualizing them as a single waiting line is alright for general explanatory purposes.
Mempool.space is an industry-standard website that gives anyone not running their own node or simply looking to get a quick look at the mempool all the relevant data. Examples are the total size of the waiting line (mempool size), how many transactions are joining the queue (incoming transactions), if blocks are coming in faster or slower than expected (estimated difficulty adjustment) and estimations of how high the transaction fee of a new transaction needs to be to be included at low, medium, or high priority.
Figure 5 visualizes the mempool of the last three months. As you would expect, the patterns described in figure 4 can also be seen here. Between late February and early April 2021, when the amount of hash rate on the Bitcoin network increased and more blocks than planned were created, the mempool size (the size of the waiting line) decreased and transaction fees decreased correspondingly. After the mid-April hash rate drop, the mempool quickly increased and transaction fees skyrocketed, but both declined quite quickly after the April 30th difficulty adjustment, and subsequent hash rate growth to all-time highs.
The Future Block Space Market
As briefly mentioned at an earlier point in this article, Bitcoin’s block subsidy is designed to decay over time, and the development of a healthy block space market where transaction fees become the primary source of revenue for miners is essential to incentivize miners to keep processing transactions and securing the network in the long-run.
This is possibly the most important test that awaits Bitcoin in the future, and is the subject of my previous Bitcoin Magazine article titled “An Ode And Forthcoming Obituary To Bitcoin’s Four-year Cycle,” which is a recommended follow-up read. Finally, if you have any questions on the topics discussed in this article, feel free to send me a message on Twitter.
Disclaimer: This article was written for educational and entertainment purposes only and should not be taken as investment advice.
This is a guest post by Dilution-proof. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
On January 3, 2009, Satoshi Nakamoto launched the Bitcoin network by mining the first block (the “genesis block”) in the Bitcoin blockchain. Today, a bit more than 12 years later, the network stores over $1 trillion in value and transfers more than $20 billion in on-chain volume on a daily basis. To get there, bitcoin went through multiple boom and bust cycles in which it was praised to the moon and declared dead many times over—every time to resurrect from the death. This process kept repeating in a roughly four-year cycle that led many to believe that there is a certain predictability to long-term bitcoin prices, of which PlanB’s popular Stock-to-Flow (S2F) model is the most well-known attempt.
In this article, we’ll first take an in-depth look at why the bitcoin price moves in a four-year cycle related to its halving schedule. We then dive into how this market cycle influences more fundamental properties of the Bitcoin network itself that are related to the behavior of miners and users. Finally, I introduce a hypothesis for how the maturation of the Bitcoin network itself will eventually extinguish its four-year cycle, and explain why this would be a good thing for the network and its users.
Bitcoin’s Fixed Supply Issuance Schedule
When Satoshi Nakamoto launched the Bitcoin network, there was a need to (1) bring the bitcoin units into circulation and (2) incentivize early users to actually participate in the network by running their own mining nodes to secure the network and gradually decrease the chances of a single entity attacking the network via a majority attack (or 51% attack).
To do this, Satoshi Nakamoto decided on a coin issuance schedule where Bitcoin network participants would receive a 50-bitcoin mining reward (also called “coinbase,” not to be confused with the eponymous exchange) per created block. Every 210,000 blocks (~4 year, assuming 10-minute block-intervals), this reward halves. After the first halving (November 28, 2012), miners received 25 bitcoin; after the second halving (July 9, 2016), 12.5; since the last halving (May 11, 2020), they received 6.25, and so forth.
By combining this coin issuance schedule with Adam Back’s ingenious proof-of-work mechanism, Bitcoin’s monetary policy regarding its supply (figure 1, blue line) and monetary inflation (figure 1, orange line) became set in stone on a per-block basis as soon as the network launched—unlike its central bank predecessors.
Impact of the Halving on Supply, Demand and Price
Intended or not, the roughly four-year halving that has occurred three times in Bitcoin’s existence so far appears to have been a consistent trigger in pushing up the price every time. As can be seen in figure 2, after every halving event (white striped vertical lines), the bitcoin price (white line) has moved up dramatically in the year after those events. The average bitcoin price during a four-year moving window (black line in figure 2) has been positive during its complete lifespan as a result.
Before each halving event, the bitcoin price is a dynamic equilibrium between
the supply of newly mined bitcoin that enters the market;
the demand for bitcoin by new market participants and recurring purchases;
the degree in which that new demand comes from long-term HODLers that take the respective bitcoin off the market; and
the degree in which increased market prices or other triggers entice existing long-term HODLers to increase the supply available on the market by selling bitcoin.
After the halving, the supply of newly mined bitcoin that enters the market is cut in half. If the demand for bitcoin remains unchanged, this means that a supply shortage is gradually formed. Since bitcoin’s supply is perfectly inelastic, this supply shortage cannot be solved by creating more bitcoin. As a result, the only way for the market to unlock supply to satisfy the demand for bitcoin is to entice current holders to sell their bitcoin—which means that the market price has to move up. Due to bitcoin’s status as a Veblen good, this rising price tends to attract even more demand, exacerbating the already existing supply shortage and driving up the price much faster than it organically would. Those price developments resulted in a temporary bubble each time that ended with a market crash and subsequent multi-month to multi-year bear market that was necessary for supply and demand to find a new equilibrium—each time at a (much) higher level than during the previous cycle.
This mechanism was brilliantly visualized by @Croesus_BTC in this tweet thread and is compiled in figure 3.
Although the post-halving price increases, the bitcoin price charts are already pretty distinct and the causal mechanism for such a cycle to exist is quite self-evident; it is nice to get more robust evidence for the notion that the bitcoin price indeed moves in a four-year cycle. In this published article on April 15, 2021, @btconometrics performed a Fourier analysis to prove that this is indeed the case. Although the statistical methods used are relatively complicated and explaining them is beyond the scope of this article, the graphical representation of the results is actually straightforward to interpret. As can be seen in figure 4, the highest values are reached very close to the red line that represents the four-year cycle, illustrating that the cyclicality in bitcoin is indeed very close to that.
The Bitcoin Price Temperature (BPT)
Now that we have insight into the mechanism that is driving bitcoin’s four-year cycles, we can take a more in-depth look at what this price cyclicality looks like. To do so, I have created a metric called the Bitcoin Price Temperature (BPT), which is described in detail here.
In short, the BPT is calculated by subtracting every daily closing price by the average bitcoin price during the previous four years, and then dividing that number by the price’s standard deviation during that time span. The result is a metric that reflects to what extent any historic bitcoin price deviates from its four-year moving average while taking its volatility into account, and, thus, how “hot” or “cold” the price is—hence the name, Bitcoin Price Temperature. By utilizing the bitcoin price’s standard deviation into the metric, the BPT metric adjusts for price volatility, unlike otherwise similar indicators like the Mayer Multiple.
The left chart in figure 5 illustrates the BPT. As shown, the bitcoin price has actually rarely been below its four-year moving average (the blue horizontal line at zero), and it has historically reached its four-year cycle tops at a price temperature of eight or higher. On a smaller time frame, the bitcoin price has also changed its bullish or bearish trajectory several times at temperatures of around two and six. While these levels have been determined based on a limited sample and thus need to be taken with a grain of salt, they are interesting price levels to monitor during bitcoin’s current and future four-year cycles—assuming those will continue to be similar to the past cycles, which will be discussed later in this article.
Another way to look at the cyclicality of the BPT and bitcoin price itself, is to “reset the clock” at every halving, creating a chart where the BPT and/or bitcoin price itself per cycle are overlaid, making them easier to compare. As can be seen in the left chart in figure 5, the price temperature gradually moves up after the halving at an increasing pace, historically creating a blow-off top circa 12 to 18 months after the halving, taking the remainder of the four-year cycle to cool off again and find an equilibrium somewhere around its four-year moving average.
The right chart in figure 6 illustrates the actual bitcoin price in United States Dollars (USD) with an overlay of the BPT and BPT Bands. Every time the price temperature reaches the cooldown period of its four-year cycle, the bitcoin price has found an equilibrium at a price level that is (at least) an order of magnitude higher than the previous cycle.
This is also why dollar-cost averaging (DCA) into bitcoin and HODLing it for the long haul (or at least four years) has historically been such an effective strategy. It doesn’t matter if you have bought the top or the bottom; as long as you have held onto your bitcoin for at least four years, you’ve historically done very well—without the additional costs of time, anxiety and in some countries (like the United States) tax burdens that come with active trading.
Impact of the Market Cycle on Bitcoin’s Hash Rate and Coin Issuance
In anticipation of each bitcoin halving, articles spreading fear, uncertainty and doubt (FUD) about something called ‘the mining death spiral’ start appearing. The mining death spiral FUD suggests that since the block subsidy is split in half, miners are faced with a 50% cut in their profitability, which will cause (some of) them to stop mining. In turn, this would make the network less secure, making it less valuable, making the price go down, further decreasing miner profitability, making them turn off more miners and so forth.
While it is true that in the short-term some miners are turning off hardware that is less efficient or running on more expensive energy, that dip is barely visible on long-term charts and ensures that the remaining mining activity on the network is actually very efficient and healthy. More importantly, that temporary dip is actually completely undone by the positive side effects of the halving-induced price increase that was described earlier.
As a result of the increasing bitcoin price following the halving-induced supply shortage, mining profitability increases again, incentivizing miners to (re)join the network. As a result, the network’s hash rate actually increases, making the network more secure and thus more valuable. This means that on a multiyear horizon, we are actually seeing the complete opposite of what the mining death spiral FUD suggests will happen—all thanks to bitcoin’s four-year cycle.
In figure 7, the almost continuously increasing hash rate of the Bitcoin network is illustrated. As can be seen, the hash rate barely drops after each halving (white striped vertical lines), and as the bitcoin price and thus the BPT measure that we introduced in the previous paragraph increases, hash rate growth accelerates. During the second half of the cycle, when price is cooling down, hash rate growth stagnates a bit—until the next halving occurs and a new market cycle incentivizes more rapid growth of this network characteristic that is so important for its overall security, actually making the network itself more valuable.
To ensure that new blocks are created every ~10 minutes (which is necessary to make the network relatively stable to transact on and that the supply issuance is actually spread out over time), the network has a built-in difficulty adjustment mechanism. Every 2,016 blocks, which is every ~14 days, the network makes it a bit easier to mine if the hash rate on the network is relatively low, or a bit more difficult to mine if the hash rate on the network is relatively high.
This means that during these periods of the cycle where the hash rate keeps going up, more new bitcoins are created than would be expected based on the original supply issuance schedule that assumes 10-minute block times. This inspired David Puell to explore the ratio of the daily coin issuance and the average daily coin issuance over the past year, which resulted in the Puell Multiple.
The Puell Multiple is displayed in figure 8, along with several levels that appear interesting based on visual inspection (which is subjective and should thus be taken with a grain of salt). As can be seen, the daily coin issuance takes an abrupt decline on the day of each halving, which is due to the halving of the block subsidy. In the months after, as price increases, mining becomes more profitable, a new hash rate floods onto the network, and the daily coin issuance ramps up again. When the bitcoin price growth stops and the market cycle finishes with a blow-off top that is followed by a cooldown period, mining profitability decreases, causing the daily coin issuance to go down again. The Puell Multiple is, therefore, regularly seen as an interesting indicator to monitor bitcoin’s cyclicality from an on-chain perspective.
Besides the hash rate growth and resulting temporary increase in daily coin issuance that are particularly indicative of cyclical miner behavior, the Bitcoin blockchain holds valuable information regarding another important group of market participants; those that use bitcoin to transact on-chain.
Influence of the Market Cycle on the Mempool and Transaction Fees
Intuitively, the first thing that you might think of to visualize the behavior of that group might be to create a chart of the number of daily transactions. If we were to do so, we would indeed see an overall trend that, as time passes, more transactions are made on a daily basis, but as the Bitcoin network matures, that growth stagnates. That stagnation can be easily explained; a Bitcoin block can only include a certain amount of transactions, so the metric wouldn’t be an ideal proxy for how crowded it actually is on the network. What happens when most or all of the newly created blocks are full, is that the number of transactions that are cued up increases. In Bitcoin, this cue is called a “mempool,” which is visualized in figure 9. As is evident based on that figure, the number of transactions that are waiting to be included in the blockchain have increased rapidly after breaking the all-time high price of ~$20,000 in December 2020.
The mempool is currently in a state where it hasn’t cleared in approximately five months, which means that, when any miner created a new block during that time span, they had plenty of unconfirmed transactions to include in the block. A logical conclusion is that miners are financially incentivized to include the unconfirmed transactions that are offering the highest transaction fee to reward the miner for including their transaction, which is indeed how most of the current miners operate.
As a result, unconfirmed transactions with a high transaction fee are included in new blocks first, while transactions with a low fee remain stuck in the mempool longer. This is visible in figure 7, where the mempool is currently particularly filled with unconfirmed transactions that pay a fee of 1-5 satoshis per vByte, while the mempool is regularly cleared from transactions of a higher fee rate.
An implication of this mechanism is that, during busy times on the network, anyone that is looking to make an on-chain transaction on the network needs to bid up their transaction fee to get their tiny share of block space on the Bitcoin blockchain that is needed to get their transaction confirmed. As such, a block space market (sometimes called “fee market”; which is technically incorrect because the block space on the Bitcoin blockchain is being bid on) develops.
Since the value of the transaction fees that are included in Bitcoin blocks essentially represents the magnitude of this developing block space market, it is a better proxy for network activity than simply looking at transaction counts. Figure 9 visualizes the average bitcoin transaction fees in United States dollars (USD) over time, overlaid by the BPT metric that we introduced before. In anticipation of each halving, the average transaction fee is already gradually increasing, but its growth particularly accelerates when the bitcoin price increases after each halving. After the market cycle reaches a blow-off top and prices start to cool down again, network activity decreases again and finds a new equilibrium when the overall bitcoin market cycle bottoms out.
Besides the cyclicality, a clear, increasing trend in the average bitcoin transaction fees can be observed in figure 9. While this may seem like a bad thing (don’t we all prefer to pay less for transacting?), this is actually of the utmost importance for Bitcoin’s long-term existence. After all, if the block subsidy declines every four years and at some point in the future disappears altogether, miners still need an incentive to keep mining and process transactions.
The Contribution of Transaction Fees to the Block Reward
Figure 11 visualizes the percentage in which transaction fees (red) and the block subsidy (blue) account for the overall block reward that miners receive when creating a block. When first glancing at these percentages on a continuous scale (left figure), it seems like transaction fees are relatively irrelevant, as the block subsidy has accounted for the vast majority of the block reward during all of Bitcoin’s history. While this is true, when these percentages are displayed on a logarithmic scale (right figure) , it becomes more apparent that over time, there is actually a clear upward trend in the degree to which transaction fees play a role in the block reward. On a cycle-by-cycle basis, you can even see that the percentage increases by roughly an order of magnitude, underlining how large this growth actually is.
While it is difficult to predict exactly when the point will be reached where transaction fees will (consistently) account for the majority of the block reward (based on eyeballing the charts above; perhaps after one to three more cycles?), as long as there is at least some activity on the Bitcoin network, it is a given that this point will be reached at some point in the future because the block subsidy trends toward zero by design.
When this point is reached, there is one more incredibly important question that we’ll get an answer on: will the hash rate on the network stay relatively stable at a level that is sufficient to guarantee the network’s overall security? If the answer to that question is “yes,” Bitcoin will have passed the biggest test in its existence and have passed the final exam toward its full maturity. Perhaps it could even be the point where the Bitcoin Core software versioning is upgraded toward 1.0 and above. While we cannot establish with absolute certainty that the question above can ultimately be answered with “yes,” a case can be made to be optimistic about the outcome, as was done by Dan Held in this May 2019 article.
This brings us to the final part of this article, where we’ll hypothesize how that perspective would impact the four-year cycle, and what that future for Bitcoin would look like.
How a Healthy Block Space Market Will Kill the Four-Year Cycle
The subtitle of this article already gave away the direction of my take on this: when Bitcoin gets to the “full maturity” mentioned above and a healthy block space market exists that is able to sufficiently incentivize miners to structurally keep the lights on, I expect the four-year cycles as we know them today to fade into oblivion.
The easiest way to substantiate this claim is to fast-forward all the way to the late 2130s, when Bitcoin’s block subsidy is estimated to run out. In the absence of a block subsidy, 100% of the new demand for bitcoin will have to be satisfied by purchasing bitcoin from existing holders (and to some extent miners that sell some of their fee revenue to pay for expenses, which will likely be just a fraction of the total supply that is available for sale on the market), creating a perfectly inelastic situation where price changes become a perfect reflection of changes in demand for bitcoin. To visualize this end state, @Croesus_BTC’s visualization of the demand/supply mechanic has been adjusted to this new situation in figure 12.
Now that we have established that the halving cycles will, by design, end at some point during the next ~118 years, it is helpful to rewind to the present and assess what the short-term path toward that end state will look like in the near future.
To understand those implications, it is important to grok that the relative impact of each halving on the block subsidy is the same (block subsidy divided by two), but the absolute impact of each halving on the block subsidy decreases over time. For example, the fourth-annual inflation rate dropped by -50% in 2012, but then by -33.3% in 2016, -9.6% in 2020 and will drop by just -3.8% in 2024, -1.7% in 2028 and -0.8% in 2032. More simply put, the larger the percentage of bitcoin’s finite supply has already been issued, the smaller the impact of a change in the remaining issuance rate on the supply that is already circulating on the market.
Now that we have established that the block subsidy is literally designed to decay into oblivion over time, the final step is to understand when the halving of the block subsidy will indeed start to lose its relevance.
The way I see it, this probably won’t be attributable to a single point in time, but it will be a gradual process that will happen when transaction fees overtake the block subsidy as the primary source of miner revenue (figure 13). After all, the smaller the contribution of the block subsidy to the portion of the miner revenue becomes, the smaller the impact of halvings will be on the supply that is available for sale on the market.
How the Death of the Four-Year Cycle Will Impact Bitcoin’s Future
When the earlier described process has progressed to a point where transaction fees have become the primary source of miner revenue and the four-year cycle has indeed decayed into irrelevance, it will impact bitcoin’s future in several ways.
First, the decay of the four-year cycle would mean that pricing models that depend on the assumption of a halving-related market cycle being present will lose accuracy and, at some point, break. This would apply to the Bitcoin Price Temperature (BPT) and BPT Bands that were discussed earlier but also for the popular S2F and S2FX models. The big question regarding the latter; would those models break to the downside (e.g., via diminishing returns as long-term volatility declines) or to the upside (e.g., via a steepening adoption curve and/or hyper-inflation-like event)?
Second, as the percentage of bitcoin’s finite supply that has already been issued increases, the bitcoin price becomes an increasingly pure reflection of the market demand for bitcoin. This means that in a long-term post-halving-cycle future, cyclicality in bitcoin will likely be more closely related to the actual economic activity of its market participants and thus their economic cycle (sometimes also called “business cycle”).
Third, if the bitcoin price increasingly becomes a pure reflection of the market demand for bitcoin, the likelihood of a dramatic exponential price rise past what we have seen so far increases. After all, due to the ever-decreasing supply issuance rate, demand for bitcoin has an increasingly direct influence on the bitcoin price. With gold, large increases in demand can be answered by increasing the supply rate via additional mining, but this is not possible in bitcoin—making it the ultimate hard money. If Bitcoin were to reach mass adoption and follow a similar technology adoption curve to what we’ve seen in the use of the internet or mobile phones (figure 14), the likelihood of a “supercycle” happening in the bitcoin price increases (or a mixture between that and its traditional four-year cycle as a more fluid transformation). Something similar to this has also been described by @Croesus_BTC in a June 2020 Twitter thread.
Fourth, another consequence of the absence of a four-year cycle as we know it could mean that the bitcoin price eventually becomes less volatile. As was recently pointed out in a note by JP Morgan, that development would be a positive for institutional interest in the asset, which would further validate it as a macro store of value.
Finally, if a healthy block space market will indeed kill bitcoin’s four-year cycle, it means that transacting on the Bitcoin blockchain will likely have become quite expensive. This means that in the future, most of us won’t be transacting via the Bitcoin base layer on a regular basis. More likely, the block space fee pressure will incentivize more effective batching of transactions (or, as Nic Carter put it during Baltic Honeybadger 2018, “container ships, not parcels,”) and broader adoption of layers (e.g., the Lightning Network) that have been built on top of Bitcoin’s base layer, which most of us will probably primarily use to interact with bitcoin, aside from occasional channel opens or closes or large transactions.
Special thanks go out to@GeertJancapfor the useful feedback on the draft of this article. Follow@dilutionproofon Twitter for continued discussion on this topic. Disclaimer: This article was written for educational and entertainment purposes only and should not be taken as investment advice.
This is a guest post by Dilution-proof. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
Over the weekend, the Bitcoin hash rate dropped off a cliff, leaving many industry participants wondering what had happened. Over the last couple of days, information and context has been provided by industry experts as to what was behind this steep fall in hash rate.
For instance, this Twitter thread by Mustafa Yilham does a great job explaining the current situation.
TLDR: A large amount of Bitcoin miners in the Xinjiang region had to shut off their machines, due to a water leakage in a coal mining plant that led the central and local governments in China to temporarily shut down operations at other coal mining operations. As it is still the “dry season” in China, a majority of Bitcoin mining operations leverage under-utilized/over-supplied electricity sources, of which a majority in China (about 80%) are currently located in the Xinjiang province, where the shutdowns were occurring.
While a plummet in hash rate caused by regulations in a single country left many worried about the resilience of the Bitcoin network, the response was largely an overreaction to a small sample size of slow blocks, early in a difficulty adjustment.
The Bitcoin network has a difficulty adjustment every 2,016 blocks, which calibrates the network in order to have blocks mined at an average time of one every 10 minutes. For example, if blocks came in at a speed of once every nine minutes over the last 2,016 blocks (or about two weeks), then the difficulty would adjust upwards by 10% in order to make it slightly more challenging to mine an additional block.
A Viral Loop Of Incentives
What is the impact of a large amount of hash power leaving the network? Does this pose a threat to the long-term security model of the Bitcoin network?
Let’s dig into the viral loop of incentives built into the Bitcoin protocol.
When a large proportion of hash rate shuts off, the pace at which blocks are mined subsequently slows down. The result of this is that fewer transactions are confirmed on the blockchain, and the Bitcoin mempool fills with unconfirmed transactions. Blockspace on the Bitcoin network is a scarce resource, and if you wish to use the protocol and the settlement assurances that come with it, you need to pay up.
The mempool works somewhat like an auction block. Transitions all come with an attached fee, and miners select the highest-paying fees to include if/when they mine a block, which is their direct economic incentive. As a result of lagging hash rate over recent days, along with increasing demand to utilize the Bitcoin network, total miner revenue has reached all-time highs.
Slower blocks lead to fewer transactions, which lead to higher transaction fees, which lead to larger miner profits, which incentivizes additional miners to participate and join the network, which increases hash rate into the future, which increases network security and the settlement assurances of the protocol.
Additionally, a consistent high-fee environment on the Bitcoin blockchain incentivizes the development of scaling solutions like the Lightning Network. Plus, regardless of what happens with miners joining or leaving the network, after a 2,016 block period, the difficulty will adjust downwards or upwards exactly proportional to the amount of how slow or fast blocks were mined compared to a 10-minute average target.
The Bitcoin network is working exactly as designed, and in a world of entropy, the incentive structure of the protocol ensures that blocks will continue to be mined, and thatthe most robust network on the planet will continue to operate with near 100% uptime.
For several years, one of the biggest hurdles to blockchain adoption has concerned the fact that it’s a rather technical space. Experienced developers find it daunting to build decentralized apps using this technology. Meanwhile, consumers unaccustomed to tokens and crypto wallets often struggle with user interfaces that are far clunkier than what mainstream platforms provide.
With cryptocurrencies punching into the mainstream consciousness like never before, it has never been more important for blockchain platforms to seize the moment and offer the streamlined, easy-to-understand products and services that the masses can embrace with minimal hassle. As the old saying goes: “If you build it, they will come.”
Blockchain enthusiasts know that this technology has potential, but you could argue that a key challenge involves conveying these advantages to the public. DApps regularly deliver features that fiat-focused, centralized platforms can never provide — yet their official websites are only understandable to those who have a PhD in cryptography. (This might be a slight exaggeration, but explaining things simply can be a weak spot for many projects.)
There are a few crucial tests to be met before blockchain becomes part of everyday life for us all. Can these platforms be as simple to use as your online bank account? Can they truly be as inexpensive and fast as the fiat payment rails that have existed for decades? And is it possible to create an environment where someone interacts with a blockchain without realizing it?
A great deal of thought also needs to be applied behind the scenes. Right now, top developers are put off blockchain because of the sheer amount of time and effort it takes to grasp basic concepts. Decentralized apps can take too many lines of code to create, in programming languages that are unfamiliar. And even if these two hurdles are overcome, sky-high gas fees can mean that using certain blockchains becomes impractical because of transaction costs.
This has a knock-on effect in other ways. Companies that are keen to start utilizing blockchain technology quickly find that they are unable to do so, because they’re struggling to find talented developers who can make it happen. This drives up costs for everyone, meaning that otherwise viable ideas may not deliver a healthy return on investment. Worse still, these hurdles can mean brilliant concepts that would benefit millions of people end up being unexplored.
A number of crypto projects have now decided that enough is enough. After years of debate and discussion, they’ve concluded that user interfaces need to be simplified, applications have to be faster and slicker, and a plug-and-play mentality must be championed when it comes to blockchain development. Back in the early 2000s, it was difficult for new websites and blogs to be created without some computing knowhow. Then the likes of WordPress arrived — providing esthetically pleasing templates and drag-and-drop modules that made the process intuitive. Where’s this for the blockchain sector?
Making the technology invisible
One network that has positioned itself as the silver bullet for making blockchain technology simple and foolproof is Hathor Network. The platform says it delivers a simplified, risk-reduced sandbox where everyone can implement blockchain — making our lives, businesses and applications better. Hathor Network says it offers a familiar environment for developers who are used to building brilliant things on Web 2.0, and its infrastructure delivers end results that mean the technology is “invisible” to the soccer moms, grandparents and technical novices who use it.
The project describes itself as “the WordPress of blockchain” — and freely admits that everything Hathor Network does, Ethereum does too. But here’s the powerful point: Hathor Network delivers a simpler suite for developers that ensures there is a reduced margin for error. Transaction costs are also far more predictable than on Ethereum, and scaling solutions are already in force. This network also champions interoperability — and this means that, if a developer doesn’t find the tools that they need on Hathor Network, they can easily establish a bridge to a blockchain that does.
As well as championing easy tokenization that allows custom tokens to be created in a heartbeat, Hathor Network delivers nano contracts — an easier, safer implementation of smart contracts that also support real-world data delivered through oracles. Pre-built and simplified, nano contracts can be created through a battle-tested, drag-and-drop interface — and in future, a marketplace will be established that enables developers to integrate existing nano contracts into their DApps with minimum hassle.
Better still, none of this is at the expense of privacy. Businesses who depend on confidentiality when using blockchain technology can benefit from their very own side-DAGs. This flexibility also extends to custom tokens, which can be melted and turned back into HTR tokens with little fuss.
Hathor Network’s development is continuing throughout 2021. Nano contracts are going to be implemented for the first time, with a plethora of new use cases to emerge. The capabilities of this network will expand with every passing month, not to mention the blockchain’s throughput.
With a number of businesses expressing enthusiasm about how blockchain can transform their operations — and the sector beginning to realize that networks need to be able to interact with one another in a fluid way — Hathor Network is hoping to demystify this technology once and for all, ending years of debate by getting things done.
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