11/09/2023 0 Comments

1. Bitcoin Inscriptions Reach Mania Levels Again, Miners Benefit

Bitcoin Inscriptions Have Risen Back To 400,000 A Day

In a new post on X, analyst James V. Straten has talked about the latest trend in the BTC Inscriptions. The “Inscriptions” refer to directly inscribing data into the Bitcoin blockchain.

The Inscriptions can be made using any data, whether text, audio, image, or even video. This technology has found use in various applications on the network, including non-fungible tokens (NFTs) and BRC-20 tokens.

Whatever type of data the Inscriptions may use, they occupy the same place in the block as normal transactions, meaning that they influence all metrics related to the network.

Image and other types are naturally data-intensive, while text-based Inscriptions are lightweight and add little memory to the blockchain. In its early life, the tech saw a dominant usage from the image type, as NFTs were the hot thing then.

As new applications surfaced, the cheaper text transactions blew up. The chart below shows the total Bitcoin Inscription count and how the distribution among the different types has changed over the past year.

The graph shows that the Bitcoin Inscriptions had been highly popular between May and September, but these transactions lost all steam in October.

Following the latest rally in the cryptocurrency’s price towards the $35,000 mark, the fad seems to have returned in the sector. Straten notes that the Inscriptions are being made at a rate of 400,000 per day again, similar to the peak seen in the mania earlier in the year.

As mentioned before, the Inscriptions are much like the normal financial transactions on the blockchain, so the spike in operations at such a high rate has been affecting the economics of the network.

In particular, the total transaction fees that miners receive have registered an uptick during phases of Inscription mania, as the chart below shows.

Normally, the block rewards make up the main source of revenue for the miners, with the transaction fees being a secondary income stream that doesn’t make up for more than 2% to 4% of their total revenue.

During periods when the Inscriptions have been popular, though, the fees have provided a significant portion of the income of these chain validators. With the Inscription count shooting up again, it’s not a surprise that the miners are once again benefitting from the fees, adding up to a notable part of their revenue.

Block rewards will run dry in the future as there will be no more BTC left to mine. The miners will thus need to rely solely on the transaction fees to make their money. Applications like the Inscriptions perhaps show how the fees could sustain these chain validators.

2. Miners sold more Bitcoin than minted in October

Leading Bitcoin miners sold 5,492 BTC during October’s market rally, exceeding their monthly production.

A notable surge in the sale of newly mined tokens was observed from public Bitcoin miners last month. According to reports, 13 leading mining entities disposed of an amount exceeding the BTC tokens they minted in October, even as the token experienced a 26% monthly surge.

Insights from TheMinerMag show that the sell-production ratio for players like Marathon Digital Holdings and Core Scientific Inc. crossed the 100% threshold. This indicates that they sold not only the entirety of their October Bitcoin yield but also tokens from existing reserves. Hut 8 and Bit Digital opted to sell a greater number, liquidating more than 300% of their produced BTC tokens in October.

This uptick to a 105% sell-production ratio starkly contrasts the 64%, 77% and 77% ratios recorded in July, August and September, respectively.

Bitcoin miners are preparing for the halving

The motivation behind this sell-off, apart from capitalizing on Bitcoin’s price recovery, is attributed to strategic financial planning in anticipation of the “halving” slated for early next year. As Bitcoin’s halving will slash the mining rewards by half, miners are increasing their capital reserves by liquidating part of their BTC holdings.

The increased sale of BTC will proactively fortify the miner’s financial positions to withstand the impending reduction in incentives. This strategic move is pivotal for sustaining their operations and ensuring long-term viability in the volatile cryptocurrency market.

3. Institutional custody of bitcoin could kill it, cautions Hayes

Potential spot bitcoin ETF approval excitement is building in the crypto ecosystem, but Arthur Hayes isn’t convinced such an event is good for bitcoin, or for the people who use it.

The crypto OG and Maelstrom Fund founder says institutional interest in bitcoin could “herald a situation that we might not actually like in the end.”

Speaking to Blockworks on the On the Margin podcast (Spotify/Apple), Hayes posits a hypothetical scenario: “Let’s say Larry Fink and his [traditional finance] ilk come in and hoover up a large percentage of the freely traded bitcoin [BTC] in circulation.”

The same institutional entities could launch bitcoin mining ETFs, he says, adding that “BlackRock is the largest shareholder of some of the largest mining operations.”

Asset managers like BlackRock are effectively “agents of the state,” Hayes cautions. “They act on what the state tells them to do.”

Hayes argues that if the state needs its citizens to “sit in the fiat banking system” in order to tax them via inflation to pay back ever-growing debts, it makes sense for institutional entities — who are, by nature, compliant with the state — to hold money in an ETF vehicle.

In such a system, Hayes argues, “You can’t actually use the bitcoin. It’s a financial asset. It’s not the actual bitcoin itself.”

“You had some fiat, you bought this derivative,” he explains. “The asset manager went and bought some bitcoin and they put it in a custodian and it sits there.”

“If the BlackRock ETF gets too big,” he warns, “it could actually kill bitcoin because it’s just a bunch of immovable bitcoin that’s just sitting there.”

Trading a sugar high today for calamity tomorrow?

Additionally, Hayes warns that the same entities could increase their grip on the network’s consensus mechanics by holding a large percentage of miners.

Certain upgrades that might be required to ensure bitcoin remains a “rock solid cryptographically hard monetary asset” — particularly regarding encryption and privacy — are not necessarily aligned with traditional finance institutions, he says.

“So would they support that?” he asks. “Open question. I don’t know, but that’s what happens when you have these large passive investors.”

Hayes says bitcoin is the antithesis of statist money “that is here for us, the people, that have the ability to send money around the world.” But he wonders aloud what might happen if most of it winds up in the custody of one or few institutions.

Of course, broader adoption of bitcoin will undoubtedly be great for the price in fiat terms, Hayes says. “But is it actually gonna be great for the usefulness of bitcoin?”

“Are we, you know, gaining a sugar high today to only engender a massive calamity in the future? I don’t know.”

Hayes says people need to think longer term about the issue. “Yes, okay, ETF comes, price pumps to whatever it pumps to — but what’s the net result of one institution holding all this crypto?”

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Harvey CHEN

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