Editor | Wu Blockchain about Blockchain
Julio Moreno, head of CryptoQuant's research department, has 13 years of commodity research experience and is at the forefront of on-chain analysis. This podcast discusses CryptoQuant's recent report on cryptocurrency trends, the Bitcoin halving event, and changes after Ethereum upgrades.
This article is only the personal opinion of the guest, not Wu Blockchain opinion, and does not provide any financial advice. Please be cautious when investing and abide by the laws and regulations of your location. The podcast was published on April 13, so some information is delayed.
CryptoQuant’s report shows a surge in demand for Bitcoin, are there any details you can share?
Since October last year, we have observed a significant acceleration in demand for Bitcoin, especially this year due to the approval of ETFs in the United States. We captured this surge in demand using our own data and a newly launched analytical tool called "Cohort". This tool allows us to drill down into the specific characteristics of Bitcoin addresses or holders, especially those who are only accumulating Bitcoin - they buy and hold Bitcoin without selling or transferring it. Historical data shows that from 2020 to 2022, the growth of Bitcoin balances of these specific holders was as high as 40,000 Bitcoins per month. The growth this year has been particularly significant, with accumulation rising to 200,000 Bitcoins per month. This large holding growth identified by our Cohort tool is not only due to ETFs purchasing a large amount of Bitcoin, but also reflects a broader trend that various holders have significantly increased their Bitcoin assets. The unprecedented level of demand we have seen has led to significant price action, which highlights that expectations around Bitcoin are changing as Bitcoin becomes a more obvious choice for investors.
Regarding Bitcoin supply, what impact does an ETF have on miners?
We have been closely monitoring the supply of Bitcoin available for purchase, including holdings by miners, exchanges, and entities such as the U.S. government. Currently, there are approximately 2.4 million Bitcoins available for purchase in the market, a number that has been steadily declining, primarily due to growing demand from ETFs and other large-scale buyers. This demand has significantly reduced the inventory that was originally expected to last approximately 50 months, now only leaving approximately twelve months of demand. This indicates that the market is experiencing an unprecedented tightening, indicating that our Bitcoin supply is running out.
This shortage reflects the typical cycles we see in the Bitcoin market, where demand greatly exceeds supply, driving prices higher and leading to bull runs. In these cycles, as prices rise, long-term holders begin to sell, making Bitcoin available in the market again. The real question is at what price will these Bitcoins become available. This is a pattern we have seen over and over again - prices rise, the market becomes tight, and then as long-term holders begin to sell, the market sees new Bitcoin inflows.
What is particularly interesting this year is that we have witnessed a new all-time high before the halving - an unexpected and unprecedented event. This reflects extraordinary demand that exceeded all our expectations. At CryptoQuant, we track spending patterns of long-term holders and various valuation indicators, which currently suggest that we have not yet reached the end of this market cycle. It looks like there is further room for prices to rise, which means that the market dynamics we are currently observing are likely to continue to evolve, driven by a combination of Bitcoin's scarcity and continued interest from new and old investors.
Is predicting Bitcoin prices the most daunting part of your job?
Our primary role is to extract and transform data generated by blockchain transactions. This includes details such as who is buying and selling Bitcoin and where those Bitcoins are going. Our goal is to provide clear insights that help determine market cycles, whether it is a bull market or a bear market. This information is very important for our clients, including hedge funds and traders, who rely on it to make informed investment decisions. In this volatile market, predicting prices is undoubtedly one of the most challenging aspects of our work. Rather than direct predictions, we focus more on providing meaningful indicators that help manage risk. These indicators can indicate whether prices are unusually high or low, when a market correction may occur, or when it is the best time to adjust a position. In essence, our analysis is aimed at risk management. This involves keeping an eye on major events that may cause market movements, such as large inflows or outflows of Bitcoin to exchanges, which may indicate upcoming selling pressure or other market activities.
Overall, our role is not just to predict market movements, but to provide a framework for understanding and responding to market dynamics. This approach helps us and our clients navigate the complexity of the cryptocurrency market and focus on mitigating risks rather than making speculative predictions.
A detailed explanation of the Bitcoin halving
Regarding Bitcoin halving, this is an event that occurs within the Bitcoin network approximately every four years. The first halving occurred in 2012, followed by halving events in 2016 and 2020, and the next halving is expected to take place on April 20 this year. In each halving event, the block reward that miners receive for validating transactions and mining blocks will be halved. Currently, miners can receive a reward of 6.25 Bitcoins per block, but after the next halving, this will be reduced to 3.125 Bitcoins per block.
This reduced block reward means that miners will be paid less for the same amount of work, which will significantly affect their revenues — especially for miners with higher operating costs. The halving actually makes mining less profitable unless the price of Bitcoin rises to offset the reduced block reward. As a result, less efficient miners, especially those with higher operating costs, will be most financially impacted. They may have to reduce their mining activities or may cease operations if they cannot maintain profitability. On the other hand, large mining companies, especially those in the United States, which generally have lower production costs, may be more comfortable continuing operations. The halving requires miners to maintain low operating costs in response to the reduced inflow of new Bitcoin, ensuring that only the most efficient miners can remain competitive and productive.
Are Bitcoin Miner Incentives Finally Coming to an End?
When the block subsidy decreases, transaction fees become an increasingly important part of miner compensation. Historically, the post-halving period often triggers a bull run, leading to price increases that increase the dollar value of miners’ revenue to compensate for the reduced Bitcoin block reward. In the long run, miners will rely primarily on transaction fees as a source of income as the block reward trends toward zero. This shift requires miners to operate efficiently to maintain profitability, especially in periods when prices do not rise immediately after the halving.
The dynamics within the Bitcoin mining ecosystem are expected to change, with transaction fees becoming the primary incentive. This means miners will need to adapt to a market where transaction fees can fluctuate wildly based on transaction volume and block space demand. If transaction demand remains high, miners can charge higher fees, creating a competitive market for block space.
Regarding Bitcoin’s development, we have seen significant activity beyond just transaction processing. The Bitcoin network has introduced second-layer solutions and features such as Inscriptions and BRC-20 tokens, which are typically associated with other blockchain platforms such as Ethereum. These developments have enhanced Bitcoin’s utility and may increase transaction volume, further affecting miner incentives. This confluence of enhanced security, robustness, and new features makes the Bitcoin network increasingly attractive to developers, potentially leading to more innovative uses and greater demand for the network’s capabilities.
Why are the attitudes of the East and the West towards BRC-20 so different?
In my experience within the industry, I have observed that Asia is generally more open to experimenting with Altcoin and participating in GameFi events, which explains their enthusiasm for BRC-20 tokens. Asia’s openness contrasts with the more conservative attitudes of the West, especially the United States and Europe, which primarily view Bitcoin as a new form of money or a reserve currency - an asset valued for its potential to store value. This fundamental difference in perspective shapes how different regions interact with various aspects of the cryptocurrency market.
For example, in Asia, people are more open to speculation, as evidenced by higher trading volumes for Altcoin than in other regions. This is particularly evident in South Korea and Japan. BRC-20 tokens, currently used primarily as memecoins, fit in nicely with the culture of speculation and experimentation prevalent in Asian markets. They offer a form of engagement and entertainment that fits with the region’s preference for new and diverse crypto experiences.
Additionally, the regulatory environment in these regions also plays a significant role. In Asia, where there may be stricter capital controls, cryptocurrencies and tokens like BRC-20 provide a way to gain exposure to more diverse and potentially riskier assets. This environment fosters a culture that is more receptive to new crypto assets that may not seem as attractive in markets with different financial norms and regulations.
What is the significance of Ethereum Dencun upgrade?
Speaking of the latest Ethereum upgrade, the Dencun upgrade, it took place a few weeks ago with the goal of increasing the space available for storing data on the blockchain. This is primarily intended to reduce transaction fees by increasing the space for data in blocks, particularly benefiting second-layer solutions designed to handle a large number of transactions. As a result of this upgrade, we have seen a significant reduction in transaction fees on Ethereum and its second layers, which supports more efficient operation of DeFi and other applications that benefit from lower fees.
The transition from Proof of Work (POW) to Proof of Stake (POS), the 2022 Merge, marks a significant change in Ethereum’s supply. This transition not only reduces rewards, but also introduces a mechanism for burning transaction fees. Transaction fee burning occurs when network activity is high, and the fees generated are permanently removed from circulation. This process essentially reduces the supply of Ethereum, making it a deflationary asset. The sustainability of this trend depends largely on the continued activity and usage of the Ethereum network - if transaction frequency and fees continue to grow, Ethereum’s supply will continue to decrease. We have observed that the supply of Ethereum has gradually decreased since the upgrade, consistent with the characteristics of a deflationary asset. This result is consistent with the goals of the upgrade and helps to continue to reduce the supply while network activity remains high.
Did the Dencun upgrade achieve the developers’ goals?
Ethereum's Dencun upgrade was implemented a few weeks ago with the goal of expanding the capacity for data storage in blocks to reduce transaction fees, especially for second-layer solutions that rely on high transaction throughput. This effectively reduced transaction fees on Ethereum and its second-layer network, in line with our expectations for the upgrade. However, while this upgrade was technically successful in reducing fees and processing more data, it did not significantly change the broader investment perspective, especially compared to previous upgrades such as Merge.
In terms of Ethereum's role compared to Bitcoin, there are clear differences in market perception and usage. Ethereum's move to proof-of-stake was primarily intended to reduce the environmental impact of mining, but also to demonstrate its superior monetary policy relative to Bitcoin through reduced inflation. While Ethereum's supply reduction theoretically strengthens its value proposition as a "store of value", it does not significantly change its position or usage in the market. Ethereum is seen as an underperformer, especially as Bitcoin continues to dominate the investment narrative, influenced by its scarcity and role as a reserve asset.
Additionally, the market is pessimistic about a potential spot ETF for Ethereum, with a low probability of approval this year. This sentiment further exacerbates Ethereum’s challenges in changing its narrative within the broader crypto market. In contrast, Bitcoin continues to attract more attention and discussion, especially regarding ETFs in other regions such as Hong Kong or Europe, which highlights the significant differences in market dynamics and expectations between the two leading cryptocurrencies.
What do you think of stablecoins?
Stablecoins play a vital role in the cryptocurrency industry, providing liquidity for various transactions and serving as trading pairs. The most important stablecoins are centralized, as they are operated by companies that keep reserves in banks. This centralization brings regulatory risks and the possibility of government intervention, which is contrary to the decentralized spirit of cryptocurrency. There is a persistent demand in the market for a stablecoin that is independent of the traditional financial system. Over the years, there have been attempts to create over-collateralized stablecoins and algorithmic stablecoins that are not related to traditional finance.
The Ethena project is an example of an innovative approach that aims to create a stablecoin completely separate from the traditional financial system. If executed correctly and promoted at scale, this could be a groundbreaking development, providing a truly independent and decentralized stablecoin that embodies the cryptocurrency community's pursuit. However, this also introduces new risks that must be managed carefully. The goal is to create a stablecoin that can maintain its value without being directly pegged to a traditional financial asset such as the US dollar.
The evolution of stablecoins represents a significant shift in the cryptocurrency narrative, toward true independence from the traditional financial system. However, this transition is complex and requires iterative improvements to address the risks inherent in decentralization and ensure stability and reliability in the broader financial ecosystem.
