It has been about two months now since the Ethereum hard fork –EIP 1559 – was implemented. This is a very brief time in which to evaluate its effects, but Edward Oosterbaan, in an opinion piece for Coindesk, believes we might already be able to see some of the positives it is bringing, especially the upgrade’s base fee burn.
Ethereum uses block rewards to incentivize miners and validators of the chain under both proof-of-work (PoW) and proof-of-stake (PoS). Bitcoin uses a similar model, except that every four years it decreases the amount paid to miners, “until the reward is extremely negligible and the bitcoin supply tops at 21 million.” Once they reach this point, miners will have to rely on transaction fees for income. This means the network will need to sustain a high level of activity in order to pay miners for their services.
With EIP 1559 Ethereum has taken an action that is the opposite of Bitcoin’s. EIP 1559 took away the vast majority of transaction fee revenue that miners previously received, but Ethereum will continue to emit block rewards to miners (and eventually validators), indefinitely. And, whilst Ethereum has an uncapped supply, the new fee burn system will counteract ETH inflation.
As we know, Bitcoin has become seen as a hedge against inflation, but if it is seen primarily as a store of value, will there be enough in transaction fees to keep miners interested in the network?
This is a difficult question to answer, because Bitcoin’s fixed supply is what makes investing in the asset so attractive. By contrast, as Oosterbaan points out, “Ethereum’s supply will be extremely dependent on network activity and the demand for blockspace.”
As he says, his comparison of the two is entirely based on how they approach miner incentives, something which EIP 1559 addresses, and he believes that if Ethereum can continue to subsidize validators without diluting those that hold ETH then it will be very promising for the network.
You might have noticed when you checked the price of Bitcoin (BTC) on 27th July that it had tipped over the $10,000 point and is continuing to rise. It was pretty unusual for a Monday, as there is usually a dip after a weekend. Not so in July..
Ron Shevlin is just one of the fintech writers and Snark Tank analyst who saw this shift as ‘The Coronavirus Crypto Craze’. He asked, “Where is this Coronavirus-fueled trading volume coming from and who will drive the future growth?” It was, and still is, a good question.
According to Cornerstone Advisors, 15% of Americans now own crypto in some form, and just over half of these people invested in cryptocurrency for the first time during the first six months of 2020. Furthermore, these new investors obtained roughly $67.5 billion in cryptocurrencies, averaging out at around $4,000 per person.
This new penetration in the USA brings it into the Top 10 countries when it comes to crypto ownership, although it still has surpass Turkey (20%) Brazil and Colombia (18%), Argentina and South Africa (16%).
Who is buying crypto?
But what we all want to know is this: who has been on a BTC buying binge during the months when the pandemic forced people to stay at home across the world. Although, of course, if you’re at home, that’s the perfect place form which to buy crypto.
High-income men with postgraduate degrees account for eight in 10 buyers, and have an annual salary of around $130,000. Then there are the Millenials and Gen Xers. Millennials (26 to 40 years old) comprised 57% of the consumers buying cryptocurrency in 2020 with Gen Xers (41 to 55 years old) accounting for 30%. Baby Boomers hardly feature accounting for only 3% of crypto consumers, and Gen Zers are similarly thin on the ground at 7%.
Significantly, the majority of buyers are customers of traditional banks rather than the new digital challengers, which is surprising. Shevlin reports, “Of the consumers buying cryptocurrencies during the Bitcoin binge, almost half—47%—are customers of Bank of America.” By contrast only 6% of the 2020 BTC buyers use a digital bank as their primary bank.
Financial health and first time buyers
Another interesting revelation from the study is, “44% of Americans who have already invested in Bitcoin and other cryptocurrencies said that their financial health is “much better” since the beginning of the Covid crisis,” whereas only 5% of all other US consumers agreed with this statement.
The first time investors are an interesting group. In some ways similar to established crypto owners, they differ in one respect: they’re changing up the financial institutions they do business with.
Half of the first timers switched their primary banking relationship in the past six months—one-third did so in the past three months alone.
The key takeaway from all this is, as Shevlin says: “
All banks—in particular, community banks and credit unions—should look at opportunities to provide Bitcoin wallets and other cryptocurrency trading services as a way to differentiate their services.”
It’s a question that I’m sure many Bitocin owners are asking. In around 90 days from now on 8th May, Bitcoin’s mining reward will be cut in half (that’s what a ‘halving’ means) and crypto commentators believe that it could trigger some significant price activity, and boost the BTC price skywards.
Currently there are approximately 18 million Bitcoin in circulation out of a total of 21 million. But, thanks to the halving protocol, this limit won’t be reached in the near future. Satoshi Nakamoto programmed the Bitcoin network protocol so that a halving would take place every four years, or every 210,000 blocks, and cut miners rewards in half. The idea being that this makes producing more coins more difficult.
This may seem counterintuitive, as miners are incentivised by the rewards. As Edith Muthoni, chief editor at Learnbonds.com told Coinrivet: “This brings us into a seeming conundrum: if miners will no longer receive block rewards (or too little), will they continue mining? What will be their motivation to stay on? What does this mean for the network and Bitcoin?”
The impact on Bitcoin mining
Once upon a time people at home could make some money from Bitcoin mining, but that ended some time ago. However, as we approach this halving, there is a serious question to be answered about how the medium and large-sized mining operations will fare.
There are fewer than three million Bitcoin left to mine, and the hash rate is hitting all-time highs. Given the cutting of rewards, it would seem that the effect on mining at least would be negative. Steve Tsou, CEO of RRMine, a Bitcoin cloud mining operation has gloomy view: “The halving in 2020 will have great impacts on Bitcoin miners: 1) Miners with low mining efficiency will be forced to pause and re-evaluate their business operations. 2) Digital mining is becoming the racetrack for giant international companies because they have more advanced machines and cheaper sources of electricity.”
Tsou’s sentiments are echoed by a number of others in the sector, including Alex Lam, one of China’s most prolific miners and CEO of RockX digital assets. He said “The next Bitcoin halving is likely to result in mining profitability decreasing significantly in the short term.”
However, depending on the price of Bitcoin on 8th May, miners’ profitability may not be so dramatically affected, at least in the short term. If the Bitcoin price rises substantially afterwards, then miners may be able to sustain their profits. A price fall, on the other hand, could see some go out of business.
The impact on Bitcoin’s price
Unless you are a miner, how many Bitcoin owners can honestly say that they are concerned about the impact on mining. What they want to know is the halving’s impact on price.
This is not the first time that a halving has occurred. The BTC price stood at $12 when the mining reward was first cut in November 2012, and stood at $652 at the time of the second halving in July 2016. Of course, as you remember, the following year brought us that sensational bull run, driving Bitcoin to $20,000. Weiss Ratings, which analyses the impact of halving’s on price, said: “So, does the Bitcoin halving help drive prices higher? Absolutely. The only question now is how high will #BTC go this time around?”
Jimmy Nguyen, president of the Bitcoin Association commented: “Some people expect the coin price to magically increase before the halving and help cover the 50% fewer coins. Even if there is some price increase, it is doubtful coin prices will double from now through April or May 2020. So mining will most likely be less profitable after the halving than it currently is.”
Ultimately, what we are likely to see when the Bitcoin halving happens is this: it will have a major impact on mining in the short and long term. Furthermore, we’ll see smaller, less sustainable operations give way to larger mining farms with access to low-cost energy.
Miners, like Bitcoin owners, will be hoping for a hike in the Bitcoin price, because that is the key to ensuring profitable mining, as well as profits for investors.
Jack Dorsey is a curious character. The combination of his business success with a somewhat eccentric lifestyle pretty much guarantees media and public interest in him. He may not be as well known as Mark Zuckerberg, but he’s probably more easily identifiable by the public than the Google guys for example. Plus, he does often look as if he might have had a lead role in Pirates of the Caribbean, or some other Hollywood production. However, what in my opinion is most interesting about him is the role he has played in promoting cryptocurrency, particularly Bitcoin.
Dorsey is not only a co-founder of Twitter, he also launched Square, a mobile payments company that is hot on crypto. Dorsey is known to be a massive Bitcoin supporter, and has vowed to help Bitcoin develop as a global currency though Square. However, he is not a Bitcoin bull — he has a diverse crypto portfolio and is always upfront about that. Square’s spokesperson told Forbes, “it’s “only a matter of time until instant, low-fee bitcoin payments are as common as cash used to be.”
And to speed this along, Dorsey’s Square Crypto division is working on a kit that should help to integrate the Lightning Network with Bitcoin wallets. Lightning is a layer-two solution built on top of the Bitcoin network that makes payments faster and cheaper, and speed and cost are key elements of taking Bitcoin mainstream.
Until now there has been a problem with scaling Bitcoin for everyday payments, and this has slowed down adoption. Dorsey wants to supercharge the leading crypto’s throughput, which is why Square announced its Lightning Development Kit (LDK) to coincide with the World Economic Forum in Davos, although it was definitely no coincidence.
As Gerelyn Terzo writes at CCN, “What Dorsey’s crypto division plans to do is give developers greater flexibility with Bitcoin and Lightning technology that in a nutshell comes down to streamlining bitcoin wallets.”
Essentially, the Lightning Network can potentially process millions of transactions per second, which is massive compared with Visa’s 45,000 transactions per second.
Dorsey deal with the volatility issue
Improving the speed and cost of Bitcoin transactions is one thing, but merchants are reluctant to accept the cryptocurrency because of its volatility. Dorsey and Square have a solution for that as well.
Square has been granted a patent that enables users to conduct fiat-to-crypto transactions. The customer can pay in bitcoin and the merchant can instantly convert it to U.S. dollar or any currency.
Basically, Dorsey is laying the foundations of an infrastructure for widespread Bitcoin use, because with instantaneous payments that can be converted into any currency, both customers and merchants have no reason to deny Bitcoin as a payment option.
If Dorsey and Square achieve this, they will surely be hailed as Bitcoin heroes. Unless you’re a Bitcoin hater!