Bitcoin fees are in free fall. Yes, you heard that right. Transactions on Bitcoin are near or at an all-time low. We got a report which details all of it, and we have the guy who wrote the report on the show.
Let's kick it off. [upbeat music] So welcome back to Bitcoin season two. You know Charlie, you know Colin, but we have a third guy here today, Will Owens. Welcome to the show, Will. Thank you so much for having me.
I appreciate it. You know, everybody's, uh, obsessed with Bitcoin's, uh, minute decline from like one twenty-four K down to like a hundred thirteen. That happens just every normal week.
But what's different this time is that transactions on Bitcoin, stuff that happens on chain, that market is looking pretty dire right now. You've-- you know, you cover a lot of Bitcoin mining stuff.
Um, this really affects like the long-term Bitcoin miner outlook. It probably hasn't affected it too much yet, but like maybe for the listener, like how important is it that we look at transaction fees right now?
I, I think that... Well, first of all, it is very strange that, and, and we'll dive into this report here in a second. Will, uh, outlines a lot of this.
It's extremely strange that Bitcoin is ripping to all-time highs and transaction fees are so low. I mean, the last time I think we really saw,
um, transaction fees keep up with kind of parabolic moves in Bitcoin, at least to as for a substantial amount of miner rewards, was like probably like twenty seventeen or twenty eighteen.
Um, you had it a little bit in twenty twenty-one, but it wasn't that crazy.
Um, and so the fact that we are having bas- you know, empty blocks or near empty blocks at a time when Bitcoin's at a hundred and twenty thousand is kind of wild.
And on a longer term view, obviously you wanna make sure that miners have revenue outside of the block subsidy, because eventually that's going to zero. I don't think that's a big problem right now, though.
I mean, some miners are definitely struggling. Margins are thin, but the ones who have cheap enough power are gonna be able to stomach it. Um, the, the, the network will always be able to adjust to those things. But
I don't know, my, my takeaway honestly from reading your report, Will, is just we need more people gambling again.
We need the ordinals degens and the inscription guys to go out there and pump out spam so that miners can get paid. I'm doing all I can. I, I...
eventually it's like pushing on a string, and I can't get the degens to like... I can't rile them up anymore. We need, uh, new on-chain games, but okay.
So we can make these qualified like statements like Bitcoin fees are down, but it helps to have the data, and that's where Will comes in. Um, so Will, you wrote this report.
Uh, can you ta- like, I guess, why did you write the report? It's kinda obvious fees are down, but like was that just like, were you just like looking at this and you hadn't seen like a coherent study on this?
Like, why did you write, put this report together? Yeah, it's a good question.
I guess I'll say like, you know, one of the things I was kind of just thinking about, I was trying to think of like what the best thing to analyze on Bitcoin was right now.
Um, and I thought about like this idea of free blocks.
Like, I was kinda just sitting on mempool.space just like looking at transaction fees, and I'm like, so many blocks keep saying like one sat per vByte, one, one sat per vByte. And I'm like, [inhales]
like how, how many blocks are there where it's actually like that, you know? Um, and so I mean, I actually had, had the data for that.
Um, so that was probably like, you know, one of my favorite charts in the report, I guess, was just like this kind of percentage of free blocks.
Um, and this is something that was like nonexistent in twenty twenty-four, um, just because of, you know, how, how the fee market has -- how the fee market was last year. Um,
but yeah, I mean, so like once I saw that, I was like, all right, you know, let's dive in, like see what, see what's happening, right? Everybody's talking about Bitcoin.
Like, you know, apparently everybody's buying Bitcoin, but nobody's actually using the chain. Um, yeah, I mean, I guess that's, that's kind of like what, what went through my mind. Yeah.
And I'll have you like k- elaborate on free blocks, but [clears throat] um, I will pull up the, the report here. If you're watching on video, I'll, I'll pull up the actual report. But, um...
and if-- and we'll try to like describe what we're looking at. It's actually kind of confusing, I think, for most people who don't spend all day on mempool.space like you do, Will.
Like, it's actually kinda confusing, like how block space is priced, what makes like an expensive block. So here's an idea.
You introd- you, you talk, you like, you run some charts, and one of the charts is you show median and average Bitcoin transactions.
What is the difference between that and, say, something like the Bitcoin transaction fee rate percentile? Is... I, I'm trying to like, you know- Yeah, for sure... get some color on this. Yeah. Yeah, yeah, for sure.
I mean, so I kind of overlaid median and average, uh, Bitcoin transaction fee, right? There's always gonna be kinda these like random outlier transactions where people like overpay, right?
You can see like the multiple of how much people overpaid, um, in fees. And so I feel like, you know, that was kind of like a, a better way to visualize it, in my opinion.
Um, especially like during ordinals and rune stuff, there were people that were like willing to pay super high fees, um, just to make sure their transactions went through.
Uh, or I, I guess I should say like went through quickly. Um- Yeah.
I'm looking at here, like if we look at April twenty twenty-four, um, we saw a fee spike where the top, like the, uh, the average transaction fee was like a hun- over a hundred dollars, which is huge. Yeah.
There was one block I was looking at. It was right around when ordinals dropped, like literally the halving block. Um- YeahI think it was something crazy like two hundred dollars or something like almost.
I don't know if it was exactly there, there, but like somewhere, somewhere around there. So then you have this- Yeah. So the percentile- Transaction versus percentile, yeah.
They actually have a chart like this, um, on mempool.space.
This is kind of-- So what I did here was I took all of the transactions and then essentially got the, like, tenth percentile transaction fee, twenty-fifth percentile transaction fee, and then, like, fiftieth percentile would be, like, the median, right?
And then seventy-fifth percentile transaction fee and ninetieth. So you can kinda see, like, the distribution of, you know, how these transaction, how these transaction fees are actually s- happening.
Um, yeah, you can see like, you know, Ordinals launch, big spike, right? And then kind of there's all this on-chain Bitcoin activity, right? You know, everybody's talking about Ordinals.
Um, people are trading a lot on-chain, right? That's-- this is like the meta. Um, and then obviously Runes launch April 2024, and we see this huge spike. And then you look after that, and it's just like,
l-like where did, where did everyone go? You know what I mean? Like- And that's when, like, the Bitcoin price was ripping too, from like- Yeah... summer '24 to today.
This, this unrelent-- you know, it's advancing to 100k plus. Um, one-- the way I kinda like to think about it, when I try to explain, like,
w- uh, some of the nuance here is like, so a Bitcoin block can have, it'll have anywhere from like two thousand to maybe up to like four thousand transactions in it, maybe on average, ballpark.
And like, yes, you could have a few transactions in that block pay something like, you know, a thousand sats per vbyte, this crazy high amount.
But if the, the rest of the transactions in that block, um, are paying like a lower amount, the average fee rate for the block may be like a little bit, uh, deceiving.
But when you have these bursts in activity and everybody is competing for transaction inclusion, then you get these really, really profitable blocks that you described, the one at the halving when Runes launched.
That was a, what was it? Like a twenty-seven Bitcoin, something twenty something Bitcoin, like, block reward. It was crazy.
And, uh, and I think, you know, a lot of people are, they only look at one dimension of transaction fees. They just look at the current fee rate that is quoted to them by like their wallet software.
They don't really get into the weeds on, uh, like w-what the, like what the aggregate market is doing.
And then you have this, you mentioned this, this concept called a free block, which is kind of the hot thing this summer. When you say free block, what actually does that, what are you like coining there? Yeah.
So it's, uh, like it's not actually free, right? This is kinda just like a term. I defined it as, um, blocks where the average fee rate was less than or equal to one sat per vbyte. Um,
and right, like I said, like this wasn't happening in 2024, and now we're starting to see, you know, more and more blocks are actually free blocks. Um, s- you know, kinda concerning if you're a miner.
Like we've been seeing a lot of these miners have been kind of pivoting to like HPC type stuff, um, just for like more, you know, um, consistent revenue streams, I guess, right? Like, as, uh, [lip smack]
I guess every halving, you know, the, the block, block subsidy, it's decreasing, so miners are kinda hoping that transaction fees become a bigger piece of the, of the pie in their revenue.
Um, you know, that's just not happening. Like, perhaps it'll start to happen, but, you know. Like, I'm not trying to be alarmist at all.
I'm kind of just analyzing the data as I see it, um, and just, you know, saying, saying it how it is. Yeah.
It's, it's-- I, I also try to like navigate, walk the tightrope of am I FUDding or am I just trying to like show the data and identify a trend? Colin, do you, I mean, you talk to miners all the time.
Do you see miners even at all concerned with this? Are they even aware that, um, we've had really, really low transaction fees over the past year?
They'll definitely be aware of it because, you know, if, if transaction fees were where they were during, you know, the big splurge in Q3 of 2024 with Ordinals and inscriptions, they'd be making
anywhere from fifteen to twenty percent more, you know, from transaction fees to their bottom line. Um, I do, I do think that o-over the long enough, o-over a long enough timeframe, it, it, it becomes more concerning.
But like right now, um, with Bitcoin's price being up, they've been able to shore up, you know, their revenues a little bit.
Hash price did get really, really choppy there, like thirty-five dollars petahash per day for an all-time low.
And so a lot of miners were like near breakeven, uh, depending on what your electricity price and your joule per terahash for your fleet was.
Um, but I do think this, this becomes like-- if w- let's fast-forward like four or five years. Are we still at this point after the next halving? That's when I would start to get a little more concerned.
All of it's also, though, contingent on Bitcoin's price, right? Because theoretically, over a long, o-over a, you know,
near to midterm timeframe, there's, there's an argument to be made that if Bitcoin's price appreciates at a rate fast enough, then the subsidy will still be worth quite a lot, and it won't really matter what transaction fees are doing.
But I'm also of the mindset that ultimately, like Bitcoin mining is going to just move closer towards the margins in terms of where electricity is producedAnd like, you're gonna have a point where like per what Will was saying about the AI and HPC pivots, right?
Um, the, the massive kind of industrial scale mines that we're used to will be a-- take on a much different form. I, I don't think like your rock tails are gonna exist.
You know, if they do, they're going to be at the site where energy is produced.
And I think eventually most hash rate will shift towards that because it will, to Will's point when we're talking about transaction fees, you are gonna have some pretty crazy fee variability when, when the tran- when transaction fee revenue eventually supersedes the subsidy.
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Be sure to hit that subscribe and give us a five-star rating, so we can continue to bring you the best content in Bitcoin. There's a bunch of places we can stick arbitrary data on Bitcoin,
and [chuckles] one of those places is op_return. Now, for the casual listener, they probably don't distinguish between where the data is.
But, um, if you roll the clock back as Bitcoin in its early days, like, tried to grapple with the reality that people are using it, not for primarily monetary transactions, kind of as a release valve, this concept of the op_return was created so that we just say, "Here's kind of an enshrined place where you can put little bits of your arbitrary data."
Now, in the year of our Lord, twenty twenty-five, and twenty twenty-four really, this has kind of taken on a new personality as we have ordinals and inscriptions which put data in different places.
But op_return, Will, you kinda g- you go into, um, some explainer in this report.
But I think it does help like, uh, give some character and color to just like the nature of the types of transactions happening on Bitcoin. So,
um, I have this chart, Will, which is the transaction composition chart. It's a great chart. I'm showing it. Can you talk me through like what I-- this chart describes? And I don't know, your thoughts or comments on it.
Yeah, I mean, so the-- in black we have the, like, non-op_return transactions, right? So these are like strictly, strictly monetary transactions on Bitcoin.
Um, and then in blue we have, you know, transactions that contain, like, op_return outputs. Um, [lip smack] and so this could be a lot of different things, right? Like runes transactions are considered this.
Um, recently we've been seeing like more and more people using op_return to kind of like anchor data on the blockchain. Um, you know, for the, for the normal user, it's not super easy to find this data.
Like, you actually have to go in a block explorer and kind of like inspect it yourself. Um, I also really like this chart right above it. It's like the all-time one. Um- Yeah...
and you can see like with the launch of runes, that kind of huge spike in blue, um, where it was previously, you know, all black, um- Yeah, and for the listener, you see basically since Bitcoin's genesis in two thousand and nine, um, op_returns pop up when they're kind of enshrined in twenty fourteen, maybe thirteen, and then, uh, op_return transactions as overall like makeup of transaction composit- composition show their head in nineteen a bit when some Chinese were getting-
What's the, what's the spike in nineteen and in twenty twenty? That was some, like, Chinese degen thing. I forget. I would actually... I remember looking this up a while ago.
Will, do you know this off the top of your head? I honestly, I need to look into that. [chuckles] I saw it- Okay... and I, I only looked into the runes. Okay. I, I, I can figure this out.
Maybe I'll, I'll circle back in the show notes or something. But basically, as a general rule of thumb, if you don't know what's happening on chain, nine times out of ten it's China doing something crazy. Uh, [chuckles]
which goes for ordinals too. But then, so again, for the listener, we have, uh, the op_return spike during the runes launch of, uh, April twenty twenty-four.
Then, then, uh, Will, we're gonna get to, uh, Lex Galaxy Digital's, uh, giant op_return press release here, one of my favorite examples you guys used. I'm pulling up mempool.space here.
Uh, can you kinda tell me the story behind this, this op_return that I'm looking at? It's a pretty cool, uh, thing that you guys did. Yeah, for sure. So, um, I mean, kind of everyone in crypto is aware that,
um, a Bitcoin whale from the Satoshi era sold eighty thousand bitcoins. Um,
and, you know, at Galaxy, we kind of wanted to-- Like, we announced this, um, in, you know, kind of a press release, and then we thought, you know, it was probably made sense to actually announce this on the Bitcoin blockchain.
Um, so that's ex- that's exactly what we did, right? And you can see in the op_return of what I, what I linked in the report, um, on mempool, the actual official announcement is, is included. It is kinda cool.
I mean, uh, I think it makes sense for Bitcoin companies to press-- to publish stuff on Bitcoin for no- notable things like this. It's fairly cheap.
Like, you guys published this for, what was it?$94 total, so under $100 to kind of issue this press release, and it got a lot of circulation, um, just because of the nature of its transaction type, and it's really not that much data.
So, uh, that, uh, is pretty cool. Um, Colin, how much have you been following the, uh, relaxing of op return standardness in the latest, um, Bitcoin,
uh, Core release? Because that's the next section of this report. I have not, Charlie. Would you enlighten me? No, I'm t- I'm gonna say, Will, you should, you should explain this.
You've got this great section here, Will. Uh, 'cause Bitcoin Core version 30 has a, a spicy release.
I mean, from what I understand, Bitcoin Core is removing this kind of like longstanding default limit of 80 bytes for op return data in transaction relay policies.
And so, you know, nodes will be able to accept up to, I believe, four megabytes of arbitrary data for op return, for per op return field in transactions.
But yeah, an important distinction I made was that, you know, it's not, it's not like this is necessary for miners or node operators to mine or relay these transactions.
It's like the choice is kind of like left up to them. Um, but yeah, I mean, we have, you know, we always have this like discourse on Twitter when there are these changes, um, to Bitcoin.
Um, a lot of people are kind of talking about concerns for spam, right? All this, all this different stuff. But like, uh, like we were talking about earlier, perhaps it's actually beneficial, um,
just because we need fees to come back, right? And we kind of want to increase on-chain activity on Bitcoin. But yeah, curious, curious your thoughts there as well.
My opinion is that, uh, op returns are, uh, pretty much harmless and have zero net negative benefit.
And whenever relay policy does not match consensus, and yet users are bypassing relay policy, that has net negative effects on node operators.
For example, if you don't know, because you're filtering, you don't know what the like landscape of transactions looks like, um, your node is worse at estimating fees.
It also means your node has to use more bandwidth whenever a block containing transactions your node did not see comes in. So it's kind of a net negative for overall node topology and bandwidth.
But these are like obscure technical things that- They're important though, and I feel like they're not raised in the filter debate enough. Yeah. Well, that's why you're sane, Colin. That's why [laughs]
I've been staring into the Nietzschean void too long here. [laughs] My take on the op return thing is if,
if people really wanna make these transactions, they can already do it anyway through out-of-band payments or through something like slipstream. So
it makes sense, and for all the reasons that you also just listed, Charlie. You have the last section here on the report, Will, which I think is, uh,
pretty interesting, and this actually I think is one of the most underrated data points for like describing the landscape of Bitcoin transactions. And you have Bitcoin held by script type.
You thought the op return debate was obscure. [laughs] Describing like Bitcoin by s- uh, output script type is even more obscure. I'm gonna throw this to you, Will. Like,
how do you try to explain this to an average person what this section describes? Um, I would just say, you know, mempool.space did a really good report on this earlier, kind of like analyzing the UTXO set.
I believe it was in May. Um, and you know, we always hear this stuff about like quantum computing's impacts on Bitcoin.
Um, different script types have different like quantum implications, most notably pay to pubkey, which is like this early legacy, legacy script type. These outputs directly contain like the full pubkey.
So, you know, if a sufficiently powerful quantum computer was able to derive private keys from public keys, like these outputs would be, you know, immediately vulnerable. Um,
and so that's like one-- I, I would say that's probably the most important thing for most people to understand is just like, you know, this is over one point five million bitcoins.
And then, yeah, you can see like the breakdown, um, for, for all the other different script types, right?
I think recently, um, pay to witness pubkey hash overtook, um, overtook all the others as like the, the one with the most amount of bitcoins. But yeah, I mean, pay to taproot, right? This is like the newest script type.
Um- Yeah... very-- I will say this one is very small in terms of like amount of bitcoin, but not as small in terms of like amount of, amount of, um, addresses.
And, and for the, for, for anyone who wonders why, the D-- again, it's the degens have created this interesting phenomenon where, uh,
the degens are posting their data to Bitcoin in the most efficient, in one of the, one of the most efficient, uh, address types, pay to taproot, because they're making basically the smallest, uh, output possible with that.
So, um, that's a very popular output type, pay to taproot, but it doesn't really represent where people are holding the bulk of their actual bitcoin, which is pay to witness public key hash. They do
blur together, um-Yeah, Will, I know that like quantum is a...
Y- I don't know if you like that, uh, might need to double tap on this, like why, uh, w- like why are certain address types perhaps more vulnerable?
And like why is my pay-to-taproot Bitcoin maybe less of a concern? Yeah, so it's all, all about just if the public key is revealed on-chain, right? And so for a pay-to-taproot address types, the pub key is safe until
it's, until the address is spent. Um, so if the, if the Bitcoin's unspent, the pub key is safe, and, you know, we've, we've been seeing like all of this discourse about quantum stuff.
Um, we're actually gonna be putting out like a, a longer quantum report and like implications, um, on Bitcoin later on.
So I'll say, well, like we'll be, we'll be diving like super deep into that and everything there, um, down the line, but yeah. Oh, is that something you're, uh, co-producing, that future report?
This is, this is mainly Alex. Gotcha. Yeah. Shout out Alex. Um,
yeah, I, I think the unspent Bitcoin by address type is one of the more interesting, like obscure, uh, characteristics of output because a lot of these outputs are very old, which means the Bitcoin hasn't really m- it's either not been moved in a recent time or the Bitcoin owners haven't like updated the types of outputs, the types of like Bitcoin scripting, uh, that they are
using. I'll just say definitely check out the mempool.space report on like analyzing the UTXO set. That is super awesome. Um, they have like some, some super good data in there. Yeah. Shout out to the mempool.space team.
This brings into like zooming out. The, this concept of paper Bitcoin summer, which is a fun meme,
and it's the-- as, as Bitcoin flows to like more custodians, uh, this appears to simultaneously result in net less activity on-chain. This kinda surprises me though,
because like, do you guys think that users are actually just taking their Bitcoin off-chain and putting it into custodians?
Or is there like something else going on where people are just less interested in transacting on Bitcoin than they were before?
I, I think as we've absorbed more users onto the network, it's just the, you know, the average user is not going to put up with self-custody.
And, you know, the learning curve is too steep for the average person probably.
So those custodial use cases are, are growing much more quickly, um, and then you have no reason to, you know, um, make any on-chain payments if you're doing that.
There's also this consideration, and we've talked about it before, I mean, as more of the trading has moved to financial products like the ETFs.
And if you think about all the Bitcoin treasury companies, all that Bitcoin is being custodied between like what? Like one or like two or three custodians. Like Coinbase, for instance, has over a million Bitcoin.
Um, th-there's no re-- like when that tra- when trades go on for that, there's no reason for that to actually take place on-chain. It's just, you know, paper swapping hands. Uh, I think that this was kind of inevitable.
Um, it's important that Bitcoin has tools for people who wanna take self-custody, and there are some very good ones, and they continue to get better.
But I think, you know, the vast majority of Bitcoin was probably always going to end up being captured this way. So I have two, two things. You know, my first one is kind of pretty much exactly what he just said, right?
When people are, you know, buying and selling like the ETF, they're not actually transacting on-chain. Like, they're not, you know, there's no transactions at the UTXO level, uh, on their end, right?
And that obviously is gonna dampen transaction fees. I would say my, my second point, um, is that like more and more of the speculative activity has moved to faster and cheaper L1s like Solana, for example.
Um, if, if somebody wants to get into crypto to trade meme coins, there's no real reason for them to be transacting on Bitcoin right now, um, just because they're-- like there's-- the UX is simply like not good enough compared to the alternatives.
And yeah, I mean, that's, you know, one of the, one of the biggest things I would say, right? Like all of, all of these degen traders are, have kinda just left the Bitcoin ecosystem, or
maybe not explicitly left, but like, you know, it's gotten weaker over time. And that's, that's a big reason why I would say is the user experience for actually participating in, in this kind of trading. Yeah.
Uh, this reminds me of one of my favorite reports, also from Galaxy Digital, back when Brandon Bailey was there.
He did a report on like the BRC-20, the spring twenty twenty-three BRC-20 run, where he was able to kind of materially attribute... Maybe it was him or maybe it was Gigi, I forget. I forget who's who.
But, you know, they did a really interesting report breakdown on like where the marginal, uh, buyer of block space came from during the s- May twenty twenty-three, uh, BRC-20 run.
One of the more interesting reports on transaction fees I've seen. Um, but Will, I'm glad you're looking at that. I'm glad the Galaxy team is, uh, on the case and tracking this.
You guys have any final thoughts before we wrap this up? Yeah, I mean, I would just say it's, it's gonna be interesting to see how it evolves, right?
Like perhaps we'll start to see some more speculative activity come onto Bitcoin. Um, it's, you know, obviously everybody's watching like Bitcoin price action itself.Just like everything there.
But in terms of transaction fees, right, it's, you know, s- it's, uh, not, not looking too great at the moment. I'll definitely, like, keep everyone updated on this.
Um, I have all the data, so I'll kinda be refreshing it every day and seeing what changes over time. But yeah, I mean, it's gonna be, gonna be super interesting to watch. Yeah. It's like the Bitcoiner's dilemma.
Like, you want transaction fees to go up for Bitcoin, but also you don't wanna have to pay those yourself. It's a double-edged sword. Yeah. So- Okay, yeah. Actually, that's a good point.
One last thing I would say for users, um, in the short term, you know, it's a, it's a really good time to, like, consolidate UTXOs. Um, very, very cheap right now.
It's kind of like a temporary gift, cheap and fast transactions. Yeah.
I actually do have one last chart, which is the y- over the net cumulative UTXO, uh, count on Bitcoin, which, as we see, kind of gradually increases until ordinals inscriptions come along in 2023, and it rockets upwards.
But then, at the end of what I'd call, like, meme coin, Bitcoin meme coin winter, uh, we have a gradual decline, and that appears to be people finally consolidating their UTXOs.
So if you're listening to this and you don't know what consolidating your, your UTXOs means, you should look at that because we want to protect you from yourself in 10 years when it gets very expensive to do that.
This is Bitcoin Season 2. Thank you so much for tuning in. Thanks, Will, for hopping on. Love to see it. Glad to have you at Galaxy, and great report. Well, thank you so much. Yeah. I really appreciate it.
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