Bitcoin Forks Pounce as Fees Remain Elevated
Crypto prices have remained subdued since they started falling over the weekend. Currently, Bitcoin is trading at around $27,500, down 0.4% in the past 24 hours.
Three straight weeks of negative sentiment have also been seen among institutional investors, with digital asset investment products recording outflows of $54 million last week, up from $72 million recorded in the last week of April, according to a new report by CoinShares.
Digital asset investment firm CoinShares follows the investment activity of exchange-traded products (ETPs), mutual funds, and over-the-counter (OTC) trusts in crypto, further noting that the largest selling pressure came from outside the US. Canada and Germany, in particular, saw $20 million and $27 million worth of outflows, respectively.
The volumes for the broader crypto industry are also at half what they were at the beginning of 2023, stated James Butterfill, Head of Research for CoinShares.
Despite sentiment in the UD turning positive, Bitcoin remains the main selling source for large investors. The asset actually saw a record weekly short interest of $23 million, mainly from European and Canadian funds.
While the interest in the crypto market seems to be waning from the rich, the largest cryptocurrency continues to be stuck in a trading range.
According to Edward Moya, a senior market analyst at foreign exchange Oanda, “if we have a de-risking moment on Wall Street, that will be enough to send cryptos toward the lows seen in mid-March.”
As for the reason behind the latest price action, the macro factor might be at play. eToro investment analyst Callie Cox believes inflation is the main concern for both the Federal Reserve and crypto traders.
In an interview with CoinDesk, she argued that while the US population wants inflation to decrease, at the same time, it wants to maintain job security. The Fed is trying to balance this, but it's a painful process though “the Fed is becoming more flexible,” she said.
The negative price performance came amidst diminishing congestion on the Bitcoin blockchain, with on-chain data showing that on Wednesday, the number of unconfirmed transactions dipped to just below 400,000 from nearly 500,000 over the weekend.
Congestion on the mempool, which is essentially waiting rooms for Bitcoin transactions, has sent the fees for sending transactions on Bitcoin upwards. But it has since come down to now settling to just over $5 from over $20 at the peak of this crisis.
Click here to learn all about investing in Bitcoin.
Activity on Bitcoin Spiking
With transaction fees on Bitcoin soaring to their highest level in two years, some highlighted that it is hurting those using Bitcoin for everyday transactions, with a $100 transaction in El Salvador costing over $20 to complete.
Meanwhile, BTC users in Africa are moving to the Lightning Network and stablecoins like USDT. The Lightning Network is a layer two solution to process transactions more quickly and cheaply.
Reportedly, the day-to-day users of Bitcoin for cross-border payments and remittances have been greatly affected. Even LN is affected by the rising BTC fees because opening a channel to the node costs more now than before.
Despite the issues, the fee spike is seen as a potential net benefit for adopting the Lightning network and other solutions.
The spike in activity and fees could very well be temporary, which has been partially due to the introduction of ordinals on Bitcoin, a protocol that allows for the creation of NFTs. The number of ordinal inscriptions has about doubled in just over a week, going from 2.5 million to 4.78 million.
The dramatic increase in Bitcoin transaction fees is primarily due to the popular new “token” standard BRC-20, which is associated with some memecoins. Unlike ERC-20, the BRC-20 token standard doesn't utilize smart contracts; rather only operates with wallets supporting the Bitcoin blockchain.
The total market capitalization of BRC-20 tokens has already surpassed $1 billion, leading Bitcoin core developers to mull taking action against BRC-20 tokens and Ordinals, which they consider network spam.
This popularity of BRC-20 memecoin minting on the BTC blockchain is causing a surge in block space demand, which sent the average fee per transaction skyrocketing, peaking at $31 on May 8, up from around $19 the day prior.
At one point, the same day, the total fees per block surpassed the 6.25 BTC block subsidy reward for the first time since 2017.
On Monday, the seven-day moving average for the number of Bitcoin transactions also hit a new high of 534,000 and 598,000 the next day, as per Bitinfochart. The average transactions per block are also at a new high of 3,778. With 400k unconfirmed transactions still pending on the Bitcoin network, the backlog is keeping transaction prices elevated.
This, however, is positive for miners as profitability has surged 66% since the beginning of the month.
Bitcoin Forks See Some Action
While Bitcoin struggled with network issues due to high activity and user demand, Bitcoin forks recorded some green.
A Bitcoin fork occurs when there's a split in the Bitcoin network. This creates two separate ‘branches,' each with its own protocol. While one branch continues to follow the pre-fork protocol, the other branch follows a new protocol with different rules.
Most Bitcoin forks have been created to upgrade the network and make it faster or increase the block size. However, not all Bitcoin forks are immediately adopted, and none of them are as popular as BTC. Bitcoin remains the number one cryptocurrency, with a market cap of $533 billion.
Bitcoin Cash (BCH)
Since Bitcoin's launch in 2009, there have been several hard forks. Among them all, Bitcoin Cash (BCH) is the most popular Bitcoin fork. BCH was created in August 2017, and it aims to tackle the scalability issues surrounding Bitcoin.
The main difference with Bitcoin Cash is its block size, which was increased from 1 MB to 8 MB. The Bitcoin Cash blockchain does not use BTC but rather BCH as its native digital currency.
BCH remains Bitcoin's most successful hard fork and is currently the 29th largest cryptocurrency with a market cap of $2.3 billion. Bitcoin Cash seems to benefit from Bitcoin's backlog of transactions as the crypto asset gained 11% while Bitcoin declined in value due to the original cryptocurrency experiencing network congestion and the resulting jump in transaction fees.
The subsequent green in BCH price could result from the market speculating a spillover of Bitcoin action on BCH. But these gains are not expected to stick, which can already be seen in its price. On Tuesday, BCH's price surpassed $123, only to now trade at $119. BCH is down 97% from its all-time high, which it hit in Dec. 2017.
Meanwhile, the Bitcoin Cash network is preparing for a May 15 upgrade that, according to Software developer Jason Dreyzehner will bring smart contracts “comparable to Ethereum” but more efficient to its network.
One of the improvement proposals set to go through on that date is the Cashtokens CHIP, which will allow for UTXO-level token creation as well as advanced on-chain applications like decentralized exchanges, higher-security vaults, and bridged sidechains.
Click here to learn all about investing in Bitcoin Cash.
Bitcoin Gold (BTG)
Bitcoin Gold is another fork of the crypto king that occurred in October 2017 and aimed to improve the accessibility of the mining process. Bitcoin's size and growth made mining challenging for regular people. As a result, Bitcoin Gold introduced a new mining protocol that could be achieved using basic GPUs. The Bitcoin Gold network uses BTG as its native digital currency.
BTG is a $241.4 million market cap cryptocurrency trading at $13.76, down 5.8% in the past 24 hours. On Tuesday, the token was trading around $13 before it hit $14.60. Much like BCH, BTG hasn't hit a new ATH since the 2017 bull market and has been down 97% since then.
Click here to know about the top five exchanges to buy BCH.
The recent market fluctuations have cast a spotlight on the performance of Bitcoin forks like Bitcoin Cash (BCH) and Bitcoin Gold (BTG). Elevated transaction fees and network congestion on Bitcoin have stirred speculation, diverting some attention toward these alternatives.
Even so, despite the temporary gains seen by these forks, their ability to maintain a steady rise in value is questionable. Meanwhile, Bitcoin retains its leading position in the cryptocurrency market, remaining the primary choice for substantial investors.
Examining the current state of the Bitcoin network reveals key contributors to its elevated transaction fees and high demand. The introduction of ordinals and the surge in popularity of BRC-20 memecoins have escalated the demand for block space, leading to higher transaction fees.
And while these hurdles pose a significant challenge, they also present an opportunity. The very issues plaguing Bitcoin might push for the increased adoption of second-layer solutions such as the Lightning Network, known for its quicker and more affordable transaction processing.
Looking ahead, Bitcoin's future is promising. The current spike in transaction fees may incentivize more miners to join the network, thus enhancing its security. New use cases for Bitcoin, like the creation of NFTs and the rapidly growing BRC-20 token market, could also stimulate further growth.
The cryptocurrency market is in a phase of downturn and uncertainty, but Bitcoin's resilience has been proven time and again. As it stands, Bitcoin is poised for continued dominance, while the short-term speculative interest in Bitcoin forks is likely to wane.