From open interest to hashrate: Everything indicates Bitcoin is about to blow up— AAX Academy
The Bitcoin halving has passed, and now it’s up to the market to stabilize and prices to gather pace. Let’s have a look at some of the key indicators to get a sense of where Bitcoin stands today and where it’s headed.
What Is Bitcoin Halving and Why Was it Important?
The Bitcoin halvening is one of the most important events in the crypto industry that roughly occurs every four years. Simply put, Bitcoin halving reduces the amount of BTC miners generate with every block they mine.
Bitcoin uses the Proof-of-Work (PoW) consensus mechanism that requires miners to solve complex mathematical puzzles to verify transactions and generate new blocks in the network.
While Bitcoin’s maximum supply is capped at 21 million coins, the cryptocurrency’s supply is only gradually released. Miners generate new blocks in the Bitcoin network approximately every 10 minutes. In exchange for maintaining the ecosystem, miners receive block rewards and a share of the transaction fees.
The initial reward miners received for each block was 50 BTC. But now, three Halvenings in, miners receive only 6.25 BTC — this means the steady supply of newly minted Bitcoin is lower, technically driving up prices.
Unlike fiat currencies that have no maximum supply caps and are using the inflationary model, Bitcoin is a deflationary currency, which means that its price will increase in the long-term if the demand stays the same (or grows).
Historically, every Bitcoin Halvening has been preceded and followed by a crypto bull market.
From November 28, 2011 to November 28, 2012 — until the date of the first BTC halving –, BTC’s price had increased by 341.90%. The cryptocurrency surged even higher in the year after the event, realizing growth of nearly 8,000% until November 28, 2013.
In 2016, during the second halvening event, the same has happened with Bitcoin. The cryptocurrency’s price has increased by 111% the year before and by 2,866% 1.5 years after BTC halving.
The Most Important Outcomes of Bitcoin Halving
While the eventual impact of the Halvening still needs to work its way into the BTC price, other developments are likewise gearing up demand for Bitcoin.
Institutional Demand Is Surging Steadily
In one of our recent AAX Academy articles, we mentioned that institutional demand for crypto has increased significantly amid the COVID-19 pandemic.
The industry’s largest digital asset manager, Grayscale, reported that its quarter-to-quarter inflows had more than doubled in Q1 2020.
Crossing the $1 billion threshold for the first time over 12 months, the digital asset manager stated that 88% of the funds originated from institutional investors in the first quarter of 2020. And the trend continues.
By aggregating the volumes of five crypto trading platforms — Deribit, LedgerX, Bakkt, OKEx, and CME –, we can see that open interest in Bitcoin options has grown from $655 million on April 22 to $946 million by May 11, Skew’s data shows.
This further increased to $1.28 billion on May 20, representing a 95% increase in less than a month.
Explainer: Open interest in finance refers to the total number of outstanding derivative contracts (e.g., options and futures) that have yet to be settled.
Skew also aggregated the open interest in BTC futures on 11 different exchanges. Based on the firm’s data, open interest in Bitcoin futures has grown from April 21’s $2.45 billion to $2.93 billion on May 11 and $3.48 billion on May 20.
While the open interest’s growth for BTC futures is more conservative than for Bitcoin options, it still shows a 42% increase in a month.
In summary, despite the pandemic and the volatility around this year’s Bitcoin Halvening, demand for Bitcoin has continued to rise.
Social Media and Google Search Crypto Traffic Grows
According to data provider The Tie, the 30-day average Bitcoin sentiment score — a metric measuring the volume of positive news and the number of negative news — was the highest on May 20 since the firm started recording this metric in 2017.
The company also stated that the 30-day average for Bitcoin mentions on Twitter had exceeded 2020 highs.
Bitcoin was mentioned in 52,210 tweets on the Halvening day, the third-highest volume recorded since July 2019, with the number of Bitcoin-related tweets surging by 42% since January 1, 2020.
In addition to the share of Bitcoin tweets from unique accounts rising from May 2018’s 35% to 50% in May 2020, the data provider also reported that BTC’s Hype-to-Activity Ratio — a measure used to analyze the relations between Twitter volume and trading activity — is at an all-time low.
According to The Tie, high activity on social media and the Hype-to-Activity Ratio’s all-time low score means that this year’s Bitcoin Halvening comes with real trading activity rather than just social hype.
We also checked Google Trends to confirm this data. According to the site’s report, the worldwide interest in the search term “Bitcoin” was at the highest between May 10 and 16 from June 23–29, 2019, and the second-highest since February 2018.
In addition to the rising interest and social media activity, the number of active Bitcoin addresses has also grown significantly since January 1, 2020.
Based on Glassnode’s data, the number of active BTC addresses has increased from 640,000 to 955,000 between January 1 and May 11.
Bitcoin Transaction Fees, Confirmation Times, and Mempool Transactions Increase
Now let’s take a look at how the Bitcoin Halvening 2020 has affected the cryptocurrency’s network.
One of the most notable differences we can see lies in the transaction costs. According to Blockchain.com’s data, the average transaction fee in the Bitcoin network has grown by nearly 800% between January 1 and May 11 (from $0.285 to $2.547).
During this period, the largest growth could be witnessed between April 28 and 30, when the average BTC transaction fee jumped from $0.664 to $2.941.
Interestingly, Bitcoin transaction fees continued to increase after Halvening day, surging to $6.633 on May 20 before experiencing a minor fall to $6.235 a day after.
If we compare May 20’s data to historical Bitcoin transaction fees, we can see that BTC transfer costs have peaked since June 20, 2018 ($6.741).
The significant rise in transaction fees is a signal that Bitcoin’s network is experiencing high traffic. However, recent BTC transfer costs are nowhere near to what they were during the bull market of late 2017 and early 2018 when the average BTC transaction fee was as high as $55.
To prove our theory, we also had a look at the average time it takes to confirm a Bitcoin transaction.
On January 1, 2020, an average Bitcoin transaction took 12.7 minutes to confirm, with the average confirmation time remaining relatively stable (usually between 15 and 25 minutes).
However, from April 17, Bitcoin transaction confirmation times have increased drastically from 17.5 minutes to 107.5 minutes on May 7 before falling to 58.6 minutes on the Halvening day.
Similar to transfer fees, Bitcoin transaction processing times have continued to increase since May 11, with the average time to confirm a BTC payment standing at 146 minutes on May 21, representing a surge of nearly 1,050% since the start of the year.
As BTC transfer confirmation times have increased significantly, so did the number of transactions currently held in the mempool (the place where pending Bitcoin transfers are stored).
Compared to January 1’s 3,260, mempool transactions have grown by 310% to 13,373 on May 11, further increasing by 255% to 47,572 pending BTC transfers on May 21.
However, taking a look at the rate with which transactions are added to the mempool, we can see that the Bitcoin network is starting to recover from the impacts of the Halvening’s “traffic shock.”
The number of new pending transfers per second has decreased from May 11’s 3.63 to 3.143 on May 21, which is a little lower than what Bitcoin had on January 1 (3.282).
Bitcoin Forks Regain Miners After Halvening Day
The third Bitcoin Halvening has also impacted miners.
Since the Bitcoin Halving reduces the amount of block rewards to half, we can expect some miners to exit the space as their operations are no longer profitable — this should lower the hashrate.
Except for a few minor falls, the Bitcoin hashrate — that refers to the total computational power of all BTC miners — has been steadily growing since mid-December 2018 until March 2020.
In March, as a direct result of the coronavirus-fueled stock market fall, the BTC hash power had experienced a flash crash, falling from 122 million TH/s to 94 million TH/s.
After a drop of 23% between March 10 and 21, the Bitcoin network almost reclaimed its lost hashrate by April 16 (119 million TH/s). Following minor decreases and increases, the BTC hash power stood at 121 million TH/s on the day of the Halvening.
However, as soon as block rewards have been cut in half, Bitcoin’s hashrate has been on a downtrend, with the cryptocurrency’s hash power standing at 94 million TH/s on May 21.
The hashrate was not the only thing that was negatively affected by this year’s Halvening.
While transaction fees have risen significantly, Bitcoin miners have lost nearly 55% of their revenue between May 11 and May 22 due to a decrease in block rewards.
Consequently, the hashrate of Bitcoin forks — Bitcoin Cash (BCH) and Bitcoin SV (BSV — has increased substantially right after Halvening day.
Since then, BCH’s and BSV’s hash power has decreased by 32% and 22%, respectively.
Bitcoin Halvening 2020: Is a BTC Price Rally Imminent?
Despite the coronavirus-fueled market crash, crypto prices have continued to rise after this year’s Bitcoin halvening.
Furthermore, institutional crypto demand continues to increase for Bitcoin options and futures, while digital assets are still trending on social media. And we can expect real trading activity to occur instead of being no more than just hype.
Based on the rising transaction fees and confirmation times, as well as the number of active Bitcoin addresses and mempool transfers, the cryptocurrency’s network continues to drive heavy traffic, even after the Halvening day.
On the other hand, miners have lost over half of their revenue, and the BTC hashrate has started to fall since May 11, as some Bitcoin miners moved to mine BCH and BSV.
As yje previous two Bitcoin Halvings were followed by major crypto bull markets, more miners can be expected to (re-)join the BTC network to benefit from lower competition, rising prices, and more (potential) profits.
If the scenario remains the same as it was during the past two Halvenings, both Bitcoin’s price and hashrate could soon experience a substantial mid- to long-term increase.
Originally published at https://academy.aax.com on May 25, 2020.