Dialogue with CryptoQuant Research Director: There is room for Bitcoin price to continue rising after the halving

Editor | Wu Says Blockchain

Julio Moreno, head of the research department at CryptoQuant, has 13 years of commodity research experience and is at the forefront of on-chain analysis. This episode of the podcast discusses CryptoQuant's recent report on cryptocurrency trends, the Bitcoin halving event, and changes following the Ethereum upgrade.

This article reflects the personal views of the guest and does not represent the opinions of Wu Says. It does not provide any financial advice. Listeners are advised to participate in investments cautiously and comply with local laws and regulations. The podcast was released on April 13, and some information may be outdated.

Text translated by AI; some content may be inaccurate. Listen to the original podcast:

Youtube: https://youtu.be/CAW2boj9lH0

CryptoQuant's report shows a surge in Bitcoin demand; what details can you share?

Since last October, we have observed a significant acceleration in Bitcoin demand, especially this year due to the approval of ETFs in the U.S., which has intensified this demand. We captured this surge using our data and a newly launched analytical tool called "Cohort." This tool allows us to gain insights into the specific characteristics of Bitcoin addresses or holders, particularly those who accumulate Bitcoin only—those who buy and hold Bitcoin without selling or transferring it. Historical data shows that from 2020 to 2022, the Bitcoin balance of these specific holders grew by as much as 40,000 Bitcoins per month. This year's growth is particularly notable, with accumulation rising to 200,000 Bitcoins per month. The significant increase in holdings identified through our Cohort tool is not only due to ETFs purchasing large amounts of Bitcoin but also reflects a broader trend where various holders have significantly increased their Bitcoin assets. The unprecedented level of demand we are witnessing has led to significant price action, highlighting that expectations around Bitcoin are changing as it becomes a more prominent choice for investors.

Regarding Bitcoin supply, what impact do ETFs have on miners?

We have been closely monitoring the supply of Bitcoin available for purchase, including the holdings of miners, exchanges, and the U.S. government. Currently, there are about 2.4 million Bitcoins available on the market, a number that has been steadily declining, primarily due to the growing demand from ETFs and other large buyers. This demand has significantly reduced the initially expected inventory that could last about 50 months, now down to approximately twelve months of demand. This indicates that the market is experiencing unprecedented tightening, suggesting that our Bitcoin supply is depleting.

This shortage reflects the typical cycles we see in the Bitcoin market, where demand greatly exceeds supply, driving prices up and leading to bull markets. During these cycles, as prices rise, long-term holders begin to sell, making Bitcoin available again in the market. The real question is at what price these Bitcoins will become available. This is a pattern we see repeatedly—prices rise, the market tightens, and then as long-term holders start to sell, new Bitcoin inflows into the market occur.

What is particularly interesting this year is that we are witnessing a new historical peak before the halving—an unexpected and unprecedented event. This reflects extraordinary demand that exceeds all our expectations. At CryptoQuant, we track the consumption patterns of long-term holders and various valuation metrics, and currently, these metrics indicate that we have not yet reached the end of this market cycle. It appears that prices have further room to rise, which means that the market dynamics we are currently observing may continue to evolve, driven by Bitcoin's scarcity and the ongoing interest from both new and old investors.

Is predicting Bitcoin prices the most challenging part of your job?

Our primary responsibility is to extract and transform data generated by blockchain transactions. This includes details about who is buying and selling Bitcoin and where these Bitcoins are going. Our goal is to provide clear insights to help assess market cycles, whether in bull or bear markets. This information is crucial 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. We focus more on providing meaningful indicators rather than direct predictions, as these indicators help manage risk. They can indicate whether prices are abnormally high or low, when market corrections might occur, or when is the best time to adjust positions. Essentially, our analysis is aimed at risk management. This involves keeping an eye on significant events that could cause market fluctuations, such as large inflows or outflows of Bitcoin to exchanges, which may signal impending 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 complexities of the cryptocurrency market, focusing on mitigating risk rather than making speculative predictions.

A detailed explanation of the Bitcoin halving

Regarding the Bitcoin halving, this is an event that occurs approximately every four years within the Bitcoin network. The first halving took place in 2012, followed by halvings in 2016 and 2020, with the next halving expected to occur on April 20 of this year. During each halving event, the block reward that miners receive for validating transactions and mining blocks is halved. Currently, miners receive a reward of 6.25 Bitcoins per block, but after the next halving, this will decrease to 3.125 Bitcoins per block.

This reduction in block rewards means that miners will receive less compensation for the same amount of work, which will significantly impact their income—especially for those with higher operating costs. The halving effectively makes mining less profitable unless the price of Bitcoin rises to offset the reduced block rewards. Therefore, less efficient miners, particularly those with higher operating costs, will be the most financially impacted. They may have to reduce their mining activities or cease operations if they cannot maintain profitability. On the other hand, large mining companies, especially those in the U.S. where production costs are typically lower, may find it easier to continue operating. The halving requires miners to maintain low operating costs to cope with the reduced influx of new Bitcoins, ensuring that only the most efficient miners can remain competitive and productive.

Will the incentives for Bitcoin miners eventually end?

As block subsidies decrease, transaction fees become an increasingly important part of miners' compensation. Historically, the later stages of halvings have typically triggered bull markets, leading to price increases that enhance the dollar value of miners' income to compensate for the reduced Bitcoin block rewards. In the long run, miners will primarily rely on transaction fees as their source of income, as block rewards tend to approach zero. This shift requires miners to operate efficiently to maintain profitability, especially during periods when prices do not immediately rise after a halving.

The dynamics within the Bitcoin mining ecosystem are expected to change, with transaction fees becoming the primary incentive. This means that miners need to adapt to a market where transaction fees may fluctuate significantly 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 the development of Bitcoin, 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 like Ethereum. These developments enhance the utility of Bitcoin and may increase transaction volumes, further impacting miner incentives. This enhanced security, robustness, and integration of new features make the Bitcoin network increasingly attractive to developers, potentially leading to more innovative uses and greater demand for network capabilities.

Why are attitudes towards BRC-20 so different between the East and West?

Based on my experience in the industry, I have observed that Asia is generally more open to experimenting with altcoins and participating in GameFi activities, which explains their enthusiasm for BRC-20 tokens. The openness in Asia contrasts sharply with the more conservative attitudes in the West, particularly in the U.S. and Europe, where Bitcoin is primarily viewed as a new form of currency or reserve asset—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, there is a greater tendency to embrace speculative activities, as evidenced by higher trading volumes of altcoins compared to other regions. This is particularly notable in South Korea and Japan. BRC-20 tokens, which are currently mainly used as memecoins, fit well into the speculative and experimental culture popular in Asia. They provide a form of engagement and entertainment that aligns with the region's preference for new and diverse crypto experiences.

Additionally, the regulatory environment in these regions plays a significant role. In Asia, there may be stricter capital controls, and cryptocurrencies and tokens like BRC-20 offer a way to access a more diverse and potentially higher-risk asset class. This environment fosters a culture that is more accepting of new types of crypto assets, which may appear less appealing in markets with different financial norms and regulations.

What is the significance of the Ethereum Dencun upgrade?

Regarding the latest Ethereum upgrade, the Dencun upgrade, which occurred a few weeks ago, aims to increase the space available for storing data on the blockchain. This is primarily to reduce transaction fees by increasing the data space within blocks, particularly benefiting second-layer solutions designed to handle a high volume of transactions. Since this upgrade, we have seen a significant reduction in transaction fees for Ethereum and its second layers, supporting more efficient operations for DeFi and other applications that benefit from lower fees.

In terms of Ethereum's supply, the transition from proof of work (PoW) to proof of stake (PoS) during the Merge in 2022 marked a significant change. This transition not only reduced rewards but also introduced a mechanism for burning transaction fees. When network activity is high, transaction fees are burned, permanently removing the generated fees from circulation. This process effectively reduces the supply of Ethereum, making it a deflationary asset. The sustainability of this trend largely depends on the continued activity and usage of the Ethereum network—if transaction frequency and fees continue to grow, Ethereum's supply will keep decreasing. We have observed that since the upgrade, Ethereum's supply has gradually decreased, aligning with the characteristics of a deflationary asset. This outcome is consistent with the goals of the upgrade, contributing to a sustained reduction in supply while maintaining high levels of network activity.

Did the Dencun upgrade achieve the developers' goals?

The Ethereum Dencun upgrade was implemented a few weeks ago with the aim of expanding the capacity for data storage within blocks to reduce transaction fees, particularly for second-layer solutions that rely on high transaction throughput. This effectively lowered transaction fees for Ethereum and its second-layer networks, aligning with our expectations for the upgrade. However, while this upgrade technically succeeded in reducing fees and handling more data, it did not significantly change the broader investment perspective, especially compared to previous upgrades like the Merge.

In terms of the comparative roles of Ethereum and Bitcoin, there are notable differences in market perception and usage. Ethereum's shift to proof of stake was primarily aimed at reducing the environmental impact of mining, but it also sought to showcase its superior monetary policy compared to Bitcoin by reducing inflation. Although Ethereum's reduced supply theoretically enhances its value proposition as a "store of value," it has not significantly altered its market position or usage. Ethereum is perceived to be underperforming, especially as Bitcoin continues to dominate the investment narrative, influenced by its scarcity and role as a reserve asset.

Moreover, the market holds a pessimistic view regarding the potential for a spot ETF for Ethereum, with low expectations for approval this year. This sentiment further complicates Ethereum's challenge of changing its narrative within the broader cryptocurrency market. In contrast, Bitcoin continues to attract more attention and discussion, particularly regarding ETFs in other regions like Hong Kong or Europe, highlighting the significant differences in market dynamics and expectations between the two leading cryptocurrencies.

What is your view on stablecoins?

Stablecoins play a crucial 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 hold reserves in banks. This centralization brings regulatory risks and the potential for government intervention, which contradicts the decentralized spirit of cryptocurrencies. 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 unrelated to traditional finance.

The Ethena project is an example of an innovative approach aimed at creating a stablecoin completely detached from the traditional financial system. If executed correctly and widely adopted, this could be a groundbreaking development, providing a stablecoin that embodies the true independence and decentralization sought by the cryptocurrency community. 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 traditional financial assets like the dollar.

The evolution of stablecoins represents a significant shift in the cryptocurrency narrative, moving towards true independence from the traditional financial system. However, this transition is complex and requires iterative improvements to address the inherent risks of decentralization and ensure stability and reliability within the broader financial ecosystem.