Wall Street Loves Bitcoin ETFs, But the Network Is Struggling to Keep Up
Bitcoin’s robust efficiency this 12 months has been largely pushed by surging demand via ETFs and Digital Asset Treasuries (DATs), however this worth momentum masks a extra regarding pattern.
In reality, knowledge recommend that community exercise has not saved tempo with demand for the asset. This divergence creates an opaque outlook for Bitcoin’s long-term well being, significantly as transaction charges, the important incentive to reward miners for securing the community, stay low.
“Digital Gold” Narrative Could Backfire
Similar to how an organization’s income drives worth to its share worth, charges are anticipated to drive worth for Bitcoin’s worth. With the fourth halving in April 2024, reducing block rewards, charges at this time account for lower than 1% of miner revenues.
CoinMetrics said that this has left miners more and more reliant on BTC worth appreciation. If charges don’t rise to compensate for declining issuance, many miners could possibly be pressured offline after extended drawdowns. This, in flip, would find yourself jeopardizing the community’s decentralization and censorship-resistance.
The centralization of hashpower already looms massive, with Foundry commanding 30% of complete hashpower and Antpool 18%. While mining swimming pools proceed to make investments closely in {hardware} to keep dominance, particular person miners struggle with profitability, usually liquidating their BTC holdings to cowl operational prices.
The long-term problem turns into clearer when contemplating the 2028 halving, which is able to scale back block rewards to simply 1.5625 BTC. Without greater price income, the danger of miner attrition will rise, and probably focus safety into fewer operators.
This structural problem is compounded by weak demand for blockspace.
Because there isn’t a lot demand for Bitcoin’s blockspace, transaction charges keep low. This makes it simpler and cheaper for on a regular basis customers to ship cash on the community. However, the demand for Bitcoin as an asset, particularly from massive institutional buyers, doesn’t translate into extra transactions taking place on the blockchain itself. Instead, these buyers primarily deal with Bitcoin as “digital gold” or a long-term retailer of worth.
Institutional buyers shopping for ETFs and DATs contribute to worth however not to on-chain exercise, leaving miners with out the fee-based incentives wanted for long-term safety. To tackle this imbalance, builders are experimenting with native BTC purposes that might restore price income to miners as an alternative of offshoring exercise to different chains.
Projects like Babylon Genesis Chain, which permits BTC holders to stake with operators securing exterior proof-of-stake networks, level to how Bitcoin might broaden its position past passive worth storage. Babylon’s launch in August 2024 briefly drove charges above $150 per block and sparked demand for blockspace. However, these spikes have confirmed short-lived, and price income stays low.
Base Layer Starves
The tokenization pattern, too, reveals the dangers of exercise migrating elsewhere: whereas Coinbase’s cbBTC has grown quickly to over 52,000 BTC in provide, largely at the expense of BitGo’s wBTC, a lot of this demand happens outdoors the Bitcoin base layer. This additionally generates little price earnings for miners.
For Bitcoin to maintain its “lofty” valuation, CoinMetrics believes that the ecosystem should discover methods to stimulate extra constant community exercise and create new demand for blockspace and reward miners for his or her position in securing the chain.
The submit Wall Street Loves Bitcoin ETFs, But the Network Is Struggling to Keep Up appeared first on CryptoPotato.