The Breakdown - The Halving and the First Fee War of the New Bitcoin Epoch

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, April 22nd, and of course, we are catching up on the halving. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Hello, friends. Well, it happened over the weekend just as anticipated Bitcoin's fourth

Starting point is 00:00:40 halving has completed, ushering the protocol into the next epic. The network's programmatic monetary policy adjusted right on schedule at Block 840,000, bringing the issuance schedule for the hardest money on Earth to 3.125 Bitcoin per block. The having occurred late on Friday night on the East Coast, but still happened on April 20th in UTC time. This having featured a fee war unlike anything we've seen before, as users bid to place a transaction in the historic block. In the lead-up to the halving, fees had already been running hot. On each of the previous three days, Bitcoin fees outpaced Ethereum fees. The halving block brought in $2.4 million in fees, making it the most valuable block ever mined. During previous cycles, mining the halving block has been

Starting point is 00:01:18 nothing but a vanity achievement for mining pools. So what's different now? The rise of ordnals over the past year has meant there was a significant monetary value attached to the achievement as well. Most of you already know all about this, but the Ordinals Protocol is based around the order that individual sats are produced, giving each sat a unique identifier. Ordinals enthusiasts have designated the first sat produced in each halving block as the epic sat. None of these ultra-rare sats have ever been sold, so it's difficult to put a price tag on them. A more common rare sat, however, was sold for $100,000 in January, and some ordinal's collectors believe the epic sat could sell for over a million dollars.

Starting point is 00:01:51 Heading into the halving, many thought that this epic sat would lead to ruthless competition from miners. The most extreme example of this would have been a block reorganization, where recently mined blocks are invalidated. This process is extremely costly, but analysts thought this might be worth it due to the value of the Epic Sat. There were attempts to reorg, but it seems that the highest value play for miners was just producing blocks normally to receive the sky-high fees, which lingered well into the weekend. Saturday ended up being the most lucrative day ever for miners. Roughly $78 million in fees were paid, smashing the previous single-day record of $24 million. Nine out of the 10 highest fee blocks were mined following the having, with the only outlier being a

Starting point is 00:02:26 a stake in overpayment of fees last November. Fees were larger than the block reward for each of the first 104 blocks, the longest streak in history. This ravenous demand for blockspace was largely attributed to the launch of a new Bitcoin-native meme coin protocol called Rooms. The protocol is viewed as a big improvement to the previously accepted standard for memecoins on Bitcoin known as BRC20. Using Bitcoin blockspace for meme coins has been wildly controversial, but there's a few interesting pieces of commentary to pick up on. For those participating in the launch of Rooms, the day was chaotic. Hundreds of meme coins were launched and there was very little consensus on where the value would accrue. Leonidas, a popular Ordinals developer, captured the chaotic mood.

Starting point is 00:03:00 During a Twitter space, as he said, as everybody is scrambling to figure out what the hell's going on, I just want to take a moment to say, it's awesome being here with all of you. The more high-level take was that this fee bonanza demonstrated fees could be a viable path forward for Bitcoin security. For years, there have been concerns that Bitcoin has a long-term security problem. Each halving reduces the payment to minors, which some think will eventually make securing the blockchain unprofitable. Bitcoin investment firm 1031 wrote in their Saturday newsletter, we expect the particular frenzy pushing fees to these levels to die down in the relatively near term. But this episode is the latest indication that concerns about Bitcoin's long-term

Starting point is 00:03:33 security budget are misplaced. Kasa chief security officer Jameson Lop tweeted, Bitcoin is on a record 100-block streak of transaction fees exceeding the block subsidy. Great to see the experiment playing out and proving the theory that fees can sustain the thermodynamic security budget. Nick Batia and Joe Consorti wrote in the Bitcoin layer that this could be a, quote, preview of what's to come in Bitcoin mining economics decades from now, as Bitcoin monetizes into a 10 trillion-plus asset, demand for the network is orders of magnitude larger than today, and we've had a few more halvings. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another

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Starting point is 00:05:14 Some of the speakers at the event include Chris Dixon, the founder and managing partner at A16Z crypto, Sergei Nazarov, the co-founder of Chainlink, Kathy Wood, the CEO of Arc, Hester Perce, commissioner of course, from the U.S. SEC, and Tom Emmer, Republican Majority Whip for the U.S. House of Representatives. Visit Consensus24.coindex.com to learn more and save 15% on registration with the code breakdown. That is 15% on registration with the code breakdown. So obviously one day of record fees doesn't prove that the long-term problem is solved. However, it does demonstrate that fees could be a viable source of security.

Starting point is 00:05:48 funding if there's a reason to use the blockchain more often. And although the average fee on halving day reached $128, the frenzy does appear to be mostly over. Average fees are now back down below $10 per transaction, which of course means that with the temporary boost fading, miners will need to make do once again with the reduced block rewards. There was tons and tons of commentary on this stuff. Investor Dan Held wrote, high fees on Bitcoin give us a preview of what's to come. If how you use Bitcoin doesn't work in a high fee environment, you're going to eventually have a problem. Bitcoin Policy Institute fellow Troy Cross summed up some of the apparent contradictions in the Bitcoin space, writing, Only in Bitcoin does an industry cheer a halving of its own revenue,

Starting point is 00:06:24 and at the same time, again, paradoxically, boo its own windfall of Bitcoin fees, and simultaneously get magically rewarded by price increases for something everyone saw coming. What can you do but laugh? Beyond the mining economics, commentators are looking forward to seeing what this new era of Bitcoin will bring. Finance CEO Richard Tang noted that there has already been a series of significant events that could drive Bitcoin adoption. He said, in addition to the ETF breakthrough, which has spurred institutional interest and participation,

Starting point is 00:06:48 another major current in crypto today is the boom of the layer two in defy activity on the Bitcoin network, fueled by the popularity of the Ordinals Protocol and Bitcoin inscriptions. Although Tang was optimistic about Bitcoin's price, he urged caution, stating, immediate price shifts in the wake of the having are not warranted, and its fundamental importance will manifest itself in longer trends in value, liquidity, adoption, and crypto's standing and acceptance as an asset class. For billionaire investor Mark Cuban, this era is all about mine. but not for the usual reason. Cuban shrugged off the importance of the halving, stating that it's just, quote, going to make it harder for miners to get paid. Instead, he's much more interested in how

Starting point is 00:07:21 Bitcoin mining fits into a rapidly changing economy, saying, the truly interesting question related to the having is the GPU market. Miners need more power. There is unprecedented demand from AI for those GPUs. Will that distort the economics of mining? Not just from the perspective of cost, but could it be a better business to use those GPUs to train models? Now, obviously, we are long past the era when miners use GPUs, given that the entire industry now uses single-purpose ASICs, but these devices do still compete for manufacturing resources, at least. And despite the confusion, Cuban still makes an interesting point. The global competition for energy and chip manufacturing capacity is definitely only increasing with the

Starting point is 00:07:55 development of AI, which means that this era could see Bitcoin miners squeeze for multiple angles, requiring a much higher Bitcoin price for them to remain in business. It seems that the having has also marked the end of bearish price action, at least for the short term. Last week saw Bitcoin dip below $60,000 multiple times, and some analysts fear to further drawdown. In the lead-up to the having, multiple research shops began to suggest that not only was the having priced in, but that it could be a sell-the-news event. Nothing close to that outcome was visible in the charts with generally positive price action. On Friday, Bitcoin jumped back to 65,000 and didn't trade below 63,000 for the entire weekend. That still leaves quite a bit of distance

Starting point is 00:08:31 back up to all-time highs, but many are relieved to see constructive price action sustained for a few days. At the time of recording, we are at 66,600, which the metalhead Bitcoiners will, I'm sure, appreciate. Bitfinex head of derivatives, Yag Cooner, warned we might not be out of the woods yet, stating, it remains to be seen if the macro conditions will affect fundamentals, but sentiment is decidedly more cautious now than it had been just a week ago. Coinbase analyst David Hahn is also wary of a post-having correction, writing, given the elevated levels of realized year-to-date volatility, a further move downwards is well within the realm of possibility. That said, options pricing and on-chain metrics still indicate constructive cyclical positioning, even as traders appear to be

Starting point is 00:09:08 preparing for possible chops lower in the near term. Coin coverhead of strategy, Duncan Ash, is convinced that once volatility declines, Bitcoin's price will settle at higher levels. He suggested that a post-having price increase will, quote, restore a closer balance between the number of buyers and sellers and settle the market. In addition, the industry will emerge with more users, a higher market cap, and greater liquidity. The large and obvious price driver behind the halving is the reduction in new supply. Many argue that Bitcoin has reached a point where supply reduction is an insignificant factor compared to the regular daily volume of trading. And while that might be a realistic take,

Starting point is 00:09:38 The narratives behind a supply reduction are still a very easy story to tell. The most obvious comparison is with the ETF flows, which flipped positive on Friday to record almost 60 million in net inflows. Post-having, around 450 Bitcoin will be created each day. Friday's ETF flows were then just enough to counteract the block reward. Post-having, that relatively unimpressive day of ETF demand will be double new Bitcoin issuance. This is, of course, what we talked about a couple times over the weekend and on Long Read Sunday, the narrative power of the having being some of the most profound power that it has. I think the point here that ETF flows give it a new denominator, basically, a new specific comparison. In other words, how many of the days Bitcoin produced were eaten up by the

Starting point is 00:10:17 ETF inflows makes it all the more powerful. Moving on, though, although the last few weeks has seen a major correction, we're beginning to see signs that the bottom is in. On-chain indicators suggest that Bitcoin holders were more than willing to buy the dip. Last Tuesday, when Bitcoin hit a two-month low, buying activity spiked. More than $1.7 billion worth of Bitcoin was sent to addresses identified for their accumulation activity. That's the largest single-day accumulation in CryptoQuant's data series using the metric. Looking at the cycle timing indicators, there could be plenty more in the tank for this bull market. Ki-Yung-Ju, the CEO of Crypto Quant, reported that newer whales are only up 1.6% on their holding so far. He classified new whales as wallets

Starting point is 00:10:53 holding at least 1,000 Bitcoin for less than 155 days. This cohort likely includes numerous ETF cold storage wallets and institutional investors. Other notable cohorts were old whales, up 223%, small miners up 131%, and large mining companies up 81%. Young Ju summed it up by saying, Not enough profit to end this cycle, in my opinion. Funding rates for perpetual futures tell a similar story. They dip slightly negative for a few days last week, their first trip into the red since November. Despite a small uptick in price over the weekend, funding rates remain very low, around a third of typical levels in March. Ted Talks macro tweeted, The market has gifted us with a beautiful reset in trader positioning for Bitcoin. Open interest-weighted

Starting point is 00:11:31 funding turned negative for the first time since October 2023. That was before Bitcoin ran from 27K to 46K without any meaningful dip. Bitcoin analyst Dave the Wave wrote, A lot is being made of the current Bitcoin halving being at the highest price as compared to previously. But this is not so significant when you see that previous halvings were all pushing previous all-time highs, with having prices within the last month spike of the previous cycle highs. The takeaway is that havings have all been more or less recoveries of price, and marking something of a midway point toward the peaks. Also, that the initial peak last time should be considered the macro top momentum-wise, even though a nominal higher price was seen on the

Starting point is 00:12:04 second peak. Elio Trades wrote, feels like one of the most asymmetric moments in crypto, below prior all-time high, ETF-Mani-s settling, just after the halving. Hard not to feel like this is the moment to absolutely stack. And indeed, this is definitely the sentiment shift that I'm seeing. We had a period there for a little bit where it was mostly gloomy, where people had started to settle into the idea that maybe, just maybe, this bull market had run out of steam really, really fast. Now, by and large, the conversation is much more about this being a good buying opportunity. Whether that plays out remains to be seen. But that's the vibes from here. Not a bad place to start the week. Anyways, guys, that is going to do it for today's breakdown. One more big thank you to

Starting point is 00:12:43 my sponsor for today's show. Check out the Ledger Bitcoin Orange Nano. Five percent of your purchase will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.

The Breakdown - The Halving and the First Fee War of the New Bitcoin Epoch

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