One Heck Of A Halvening

The fundamental idea behind Bitcoin is that, if you restrict the supply of something, its price will rise. That is why the system arranges that there will only ever be 21 million Bitcoin by halving the reward paid for mining the next block every 210,000 blocks (about every four years), an event called the "halvening" (or more recently just the halving). It is an article of faith among the crypto-bros that, after the halvening, the price will rise. For example:

In the image below, the vertical blue lines indicate the previous three halvings (2012-11-28, 2016-7-9, and 2020-5-11). Note how the price has jumped significantly after each halving.

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The most recent halvening happened on Friday, April 19^th. It was eagerly awaited so, six weeks later, it is time to go below the fold and look at the effects.

Before

Lets start back in October when the Bitcoin "price" was in the high $20Ks. This was a problem, because only the most efficient miners could make a profit at that "price". They could look out six months to see the looming halvening, which would mean that even the most efficient, with their income halved, would be losing a lot of money. Something needed to be done. By April the price needed to be at least in the mid $50Ks, or the Bitcoin mining industry would suffer a bloodbath.

Date	USDT	Change	BTC	Change
	109	109	$103	$103
10/01/23	83.26	0.38	27,976	2,175
11/01/23	84.92	1.66	35.442	7.466
12/01/23	89.54	4.62	38.689	3,247
01/01/24	91.74	2.20	44.187	5,498
02/01/24	96.21	4.47	43.077	-1,110
03/01/24	99.26	3.05	62.432	19,355
04/01/24	104.70	5.44	69.705	7,273
04/17/24	109.03	4.33	61,275	-8,430

Coincidentally, October was when Tether started printing USDT at a rate only before seen during the heady days of 2021. At the start of October there were 83B USDT, by the halvening there were 110B, 32.5% more.

The extra supply of 27B USDT, whose primary function is to buy cryptocurrency, certainly created demand for Bitcoin, whose supply over the same period increased by only 0.95%. This excess of demand over supply, as the crypto-bros would have predicted increased the price. But by 149%, which might have been more than they predicted. Note that it peaked at $73,094 on March 13^th, 35 days before the halvening, and has trended lower since.

Source

This huge pump in the BTC "price" meant that the most efficient miners's margins went from scant to extortionate, and sucked in a whole lot of mining rigs that had been turned off as being uneconomic. In the graph of the 30-day moving average hash rate, the rate of increase is lower until around the start of the pump in October, then it increases as the pump takes hold. The earlier rate may represent the rate at which Bitmain can ship the latest rigs, the additional later rate probably represents re-activated older rigs.

David Pan's Bitcoin Miners Power Up Rigs to Record Levels Ahead of ‘Halving’ reported the mining surge a week before the halvening:

Bitcoin mining companies are boosting their cash reserves to cope with the negative impact from the halving through a variety of channels including running their operations at full capacity or expanding them to produce and sell more coins amid soaring Bitcoin prices in the latest rally.

Source

Omkar Godbole's Crypto Miners Run Down Bitcoin Inventory to 3-Year Low in a Strategic Pre-Halving Move had more detail on how they were "boosting their cash reserves":

The number of bitcoin held by miners ... declined to 1.794 million BTC this week, the lowest since early 2021, according to data source CoinMetrics.

The so-called miner balance has fallen by 27,000 since November, implying steady selling in the months leading up to the quadrennial mining reward halving.
...
The rally has allowed miners to take profits at higher prices and fund equipment upgrades to prepare for the reduced rewards rate, according to algorithmic trading firm Wintermute.

"With miners' holdings still near an all-time high in USD terms ($124 billion), this sell-off appears to be a strategic move for profit-taking and operational upgrades, marking a behavioral change from the last cycle," Wintermute said in a weekly newsletter.

Some miners, having ridden the hype around the halvening and cashed in their winnings, have pivoted to the probably more durable AI hype, as David Pan reported in Bitcoin Miner Core Scientific Converts Data Infrastructure for AI:

The Austin, Texas-based company deployed 16-megawatt data-center capacity for AI startup CoreWeave Inc. and plans to convert more going forward. The move comes amid a slump in Bitcoin mining revenue and growing demand for data centers to host graphics processing units to power AI applications.

After

Date	USDT	Change	BTC	Change
	109	109	$103	$103
04/19/24	109.78	0.75	63,851	2,576
04/26/24	110.52	0.74	63,750	-377
05/03/24	110.83	0.31	62,891	-859
05/10/24	110.83	0.00	60,793	-2098
05/17/24	111.39	0.56	63,066	2,273
05/24/24	111.92	0.53	63,526	460

What has happened since the halvening? Ten days after the event that was supposed to send the BTC "price" soaring Sidhartha Shukla wrote in Bitcoin Faces Worst Month Since FTX Crash With ETF Demand Cooling:

The much-anticipated Bitcoin halving, a quadrennial event that reduces the supply of new coins in the market and historically acted as a price tailwind, had minimal impact since it happened on April 19.

Source

As the table shows, the flood of new Tethers dried up, and so the BTC price trended down. And, as Olga Kharif reported three weeks later, Trading on Crypto Exchanges Fell for First Time in Seven Months:

Spot trading volume on so-called centralized exchanges such as Coinbase Global, Binance and Kraken tumbled 32.6% to $2 trillion last month, according to data from researcher CCData. Derivatives trading volume also declined for the first time in seven months, falling by 26.1% to $4.57 trillion.

Kharif's graph shows the trading frenzy triggered by the flood of new Tethers peaking in March.

Source

As might have been expected, halving the miners' income even from its pumped-up level has started to force the less efficient players out. The hash rate graph is extremely noisy, with routine daily swings of more than 20%, but the graph of the 30-day moving average hash rate shows that it peaked about a week after the halvening, and a week later started a downward trend.

It isn't just that the miners' income has been halved. It is also that their costs are rising, as David Pan's Bitcoin ‘Halving’ Will Deal a $10 Billion Blow to Crypto Miners explains:

“Power in the US is extraordinarily constrained,” said Adam Sullivan, chief executive officer at Austin, Texas-based Core Scientific Inc., one of the largest public Bitcoin mining companies. “Right now, miners are competing against some of the largest tech companies in the world, who are trying to find space for data centers, which are high energy consumers too.”

The nascent AI industry is drawing in massive amounts of capital, which is making it harder for miners to secure favorable electricity rates with utility companies. Amazon.com Inc. is set to spend almost $150 billion on data centers, while Blackstone is building a $25 billion empire of centers. Google Inc. and Microsoft Corp. are also making hefty investments.

“The artificial intelligence crowd is willing to pay three or four times what Bitcoin miners were paying last year” for electricity, said David Foley, co-managing partner at Bitcoin Opportunity Fund, which has made investments in both public and private miners. That is happening across the globe, he said.

Of course, if the miners' break-even last year was around BTC=$25K, the halvening would put it at $50K. So now, at around $67K, the miners can afford to pay more for power, but not "three or four times" more. Pan points out another problem for the miners:

The tech giants also have an edge in acquiring power from utilities, given their consistent revenue stream, whereas crypto mining revenue fluctuates with the rise and fall in Bitcoin prices. Utilities consider tech companies as more reliable purchasers given their strong balance sheets, said Taras Kulyk, CEO at crypto-mining services provider SunnyDigital.

With that competition in place, low-cost power contracts could be tougher to renew when existing agreements expire. Large-scale Bitcoin miners tend to lock in energy prices, typically for a few years, said Greg Beard, CEO of public Bitcoin miner Stronghold Digital Mining Inc.

Transaction Fees

Source

One might have expected a gradual decrease in the hash rate to start as soon as the supply of mining rewards was halved. Why did miners increase the hash rate after their block reward was halved? The answer is that there was a massive spike in transaction fees. A week before the average fee had been $2.82. The day before the average fee was $19.09. On halvening day the average fee was $127, a 565% rise. A week later it was $4.42. These massive fee spikes caused when everyone wants to transact are inevitable given that Bitcoin is limited to around 7 transactions per second.

Source

The day of the halvening the miners made a total of $108M. This bonanza completely reversed the normal state of the Bitcoin blockchain, in which transactions are around 95% subsidized by inflating the currency with block rewards, to a state in which the block reward was less than 20% of the miners' income. As I discussed in Fee-Only Bitcoin, this is close to the state Bitcoin will be in all the time after three more halvenings in 2036. I predict that the average fee then will be around $90/transaction, and that spikes could easily exceed $540/transaction.

The explanation for the spike in fees lies in something else that deliberately coincided with the halvening which caused a huge surge in demand for transactions. Joel Agbo's What Are Bitcoin Runes? Bringing Memecoins to Bitcoin explains:

Casey Rodarmor, the creator of the Ordinals protocol that lets users create NFT-like inscriptions on the Bitcoin blockchain, is releasing Runes, a new protocol that lets users easily create tokens on top of Bitcoin like Solana and Ethereum. While the BRC-20 and SRC-20 token standards already exist, these are based on Ordinals theory, which can result in UTXO proliferation that spam Bitcoin,

In an attempt to create a healthier way of etching tokens on the Bitcoin network, Rodarmor announced Runes in September 2023 and has been working on this since then. As the protocol nears its launch date, there is an increase in interest around Runes and what it could mean for Bitcoin.

“Creating a good fungible token protocol for Bitcoin might bring significant transaction fee revenue, developer mindshare, and users to Bitcoin.”

- Casey Rodarmor, creator of Runes

Bitcoin Runes launchedon Block 840,000, following the Bitcoin halving in April 2024. The creator does not impact Bitcoin, although it adds to the excitement that follows the fourth Bitcoin halving. Rodarmor states that Bitcoin Runes’ simplicity and overall architecture will aid the primary reason for its development – the creation of fungible tokens on the Bitcoin blockchain.

TheMinerMag's Bitcoin Miners Bag $109M in Halving Day Rewards as Hashprice Soars to Two-Year Highs summarizes what happened:

The soaring transaction fees resulted from on-chain users rushing to create meme-like tokens on bitcoin using the Rune protocol, which is similar to the ERC-20 standard for creating tokens on Ethereum.

Although tokens created on Rune are fungible, the values are subject to speculations on various measures such as how early they were created, the uniqueness and quality of their symbols, and the potential of being listed on exchanges.

According to a Rune explorer, 1,750 Rune projects have been created as of writing, or as the protocol terms it, “etched.” For instance, some of the early “etched” projects are called “MASSIVE•PILE•OF•SHIT” or “DOG•GO•TO•THE•MOON“

Because the protocol utilizes bitcoin’s UTXO (unspent transaction output) model, it creates a mechanism where a user’s transaction for a token issuance will first enter bitcoin’s mempool and will be successfully created after the transaction is confirmed.

As bitcoin influencer Jimmy Song put it here, explaining the current fee market dynamics, this mechanism also creates room for “squatters” to snipe a user’s creation by outbidding them using a higher fee.

“Whichever comes first gets the symbol and the asset issuance. But if you want to squat on a good symbol name, you can just look for mempool transactions that are attempting to create a new asset and create your own with a bigger fee,” Song wrote.

Source

This is another form of Miner's Extractable Value in Ethereum. But the sugar high didn't last, as Muyao Shen and María Paula Mijares Torres reported in Bitcoin Miner Boosting Memecoins Allure Already Begins to Wane:

Just as the April 19 “halving” reduced the amount of tokens awarded to miners for validating transactions, network transaction fees jumped as users rushed to mint the speculative coins on Bitcoin for the first time. The process is enabled by the Rune protocol, through which people can create their own fungible tokens. Dune Analytics’ data shows that the total transactions in Runes dropped to around 45,700 on Monday from its peak at above 750,000 on April 23.
...
Since the protocol launch, Runes have generated 2,169 Bitcoin, or approximately $137 million, in fees, according to data compiled by Dune Analytics user cryptokoryo. The share of transactions related to Runes peaked on April 23, where it counted for 81% of all Bitcoin transactions.

$139M in 9 days to the miners for 71,381 memecoins, whose "market cap" according to runealpha.xyz is 55,765BTC ($3.8B) down 99.4%). If that is right, at one point the runes were "worth" $635B! What an amazing innovation that creates $635B out of thin air in a few days!

Tether

There are two possible, not mutually exclusive, reasons for the flood of 27B USDT:

1. Speculators, believing that the halvening would send BTC moonwards, bought 27B newly created USDT with $27B USD. They used the 27B USDT to buy BTC, more than doubling the "price".
2. Holders of BTC pledged it as collateral for loans of 27B newly created USDT from Tether. They used the 27B USDT to buy BTC, more than doubling the "price". They then sold half the newly doubled BTC for USDT, with which they repaid the loan. At the peak anyone who bought BTC between the beginning of the pump and November 11^th November had more than doubled their money.

Case B is Tether's "magic money pump"; I wrote about it in 2020's Stablecoins pointing out that, among other research:

Is Bitcoin Really Untethered? by John Griffin and Amit Shams shows that:

Rather than demand from cash investors, these patterns are most consistent with the supply‐based hypothesis of unbacked digital money inflating cryptocurrency prices.

Their paper was originally published in 2018 and updated in 2019 and 2020.

Ponzi Funds by Philippe van der Beck, Jean-Philippe Bouchaud and Dario Villamaina describe a similar "magic money pump" in certain mutual funds whose holdings are concentrated, as BTC hodlers' are:

Flow-driven trading in these securities causes price pressure, which pushes up the funds' existing positions resulting in realized returns. We decompose fund returns into a price pressure (self-inflated) and a fundamental component and show that when allocating capital across funds, investors are unable to identify whether realized returns are self-inflated or fundamental. Because investors chase self-inflated fund returns at a high frequency, even short-lived impact meaningfully affects fund flows at longer time scales. The combination of price impact and return chasing causes an endogenous feedback loop and a reallocation of wealth to early fund investors, which unravels once the price pressure reverts.

This effect mirrors that in Bitcoin. If, for example by wash trading or borrowing loan-backed USDT, HODL-ers can start a BTC price spike other speculators will join in and thus create an "endogenous feedback loop". In ETFs, van der Beck et al estimate that this effect reallocates $500M/day to earlier investors.

I returned to the idea of "magic money pumps" in 2021's Stablecoins Part 2 as news came out that the DoJ had a criminal investigation into Tether. Now, Amy Castor and David Gerard's Tether and sanctions: what’s coming for Paolo’s beautiful launderette discuss law enforcement's increasing pressure on Tether because of its use in rampant sanctions evasion. They list Islamic Jihad, Hamas, Venezuela's oil industry and Russia's war on Ukraine as being funded via Tether:

Chainalysis found that stablecoins like Tether were used in the vast majority of crypto-based scam transactions and sanctions evasion in 2023.

TRM Labs concurred, saying that Tether was the most used stablecoin in illicit crypto flows in 2023. Tether on the Tron blockchain in particular had “cemented its position as the currency of choice for use by terrorist financing entities.”