Julio Moreno, the Head of Research at CryptoQuant with over 13 years of expertise in commodity research, leads the forefront of on-chain analytics. This podcast discusses CryptoQuant’s recent report on cryptocurrency trends, explores the Bitcoin Halving event, and examines the changes following the Ethereum upgrade.

The views expressed by the interviewee are personal opinions and do not represent the views of WuBlockchain or constitute any financial advice. Readers are advised to strictly comply with local laws and regulations.

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CryptoQuant’s report shows a surge in Bitcoin demand, any details to share?

Since October last year, we’ve observed a significant acceleration in Bitcoin demand, particularly intensified this year due to the approval of ETFs in the USA. This surge in demand has been captured using our data along with a new analytical tool we launched, called the Cohort. This tool allows us to delve deeply into the specific characteristics of Bitcoin addresses or holders, particularly focusing on those who solely accumulate Bitcoin — they purchase and hold without selling or transferring. Historically, from 2020 to 2022, the growth in the balance of these specific holders oscillated up to forty thousand Bitcoins a month. This year, there has been a remarkable increase, with accumulations rising to two hundred thousand Bitcoins monthly. This substantial growth 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 are significantly increasing their Bitcoin assets. The unprecedented levels of demand we are seeing have led to significant price actions, which underscores the changing expectations around Bitcoin as it becomes a more obvious choice for investors.

In terms of Bitcoin supply, what impact could ETFs have on miners?

We’ve been closely monitoring the Bitcoin supply available for purchase, including holdings by miners, exchanges, and other entities such as the US Government. Currently, there’s about 2.4 million Bitcoin readily available, a figure that has been steadily declining primarily due to the growing demand from ETFs and other large-scale buyers. This demand has significantly diminished the inventory that was originally expected to last for about 50 months but is now down to just twelve months’ worth of demand. This suggests an unprecedented tightening of the market, indicating that we are running out of Bitcoin available for easy acquisition.

This shortage reflects the typical cycles we see in the Bitcoin market, where demand significantly outstrips the supply, driving up prices and leading to bull runs. In these cycles, as prices rise, long-term holders start to sell, making Bitcoin available again in the market. The real question is at what price these Bitcoins will become available as the cycle progresses. It’s a pattern that we’ve seen repeatedly — prices increase, the market becomes tight, and then as long-term holders begin to sell, the market receives fresh Bitcoin inflows.

This year has been particularly interesting as we witnessed a fresh all-time high before the halving — an event that was unexpected and unprecedented. It reflects the extraordinary demand that has surpassed all our expectations. At CryptoQuant, we track spending patterns of long-term holders and various valuation metrics which currently suggest that we are not at the end of this market cycle. There appears to be room for further price increases, which means the market dynamics we are observing now could continue to evolve, driven by both the scarcity of Bitcoin and the ongoing interest from new and existing investors.

Predicting Bitcoin prices: the hardest part of your job?

Our primary role involves extracting and transforming data generated by blockchain transactions. This includes details like who is buying or selling Bitcoin and where these Bitcoins are going. Our aim is to provide clear insights that help determine market cycles, whether we are in a bull or bear market, among other things. This information is crucial for our clients, which include hedge funds and traders, to make informed investment decisions.

Predicting prices in this volatile market is undoubtedly one of the most challenging aspects of our work. Instead of direct forecasting, we focus more on providing meaningful metrics that help manage risk. These metrics indicate whether the price is unusually high or low, when a market correction might occur, or the best times to adjust positions. Essentially, our analysis is geared towards risk management. This involves staying aware of potential market-moving events, like significant inflows or outflows of Bitcoin to exchanges, which could signal impending sales pressure or other market activities.

Overall, our role is not just about predicting market movements but providing 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 risks rather than making speculative forecasts.

Detailed explanation of Bitcoin Halving

About the Bitcoin halving, it’s an event that occurs approximately every four years within the Bitcoin network. The first halving was in 2012, followed by others in 2016 and 2020, with the next scheduled for April 20th this year. During each halving event, the block reward that miners receive for verifying transactions and mining blocks is cut in half. Currently, miners are awarded 6.25 Bitcoin per block, but after the next halving, this will reduce to 3.125 Bitcoin per block.

This reduction in block rewards means that miners will receive less compensation for the same amount of work, significantly impacting their revenue — particularly for those with higher operational costs. The halving effectively makes mining less profitable unless Bitcoin’s price increases to offset the reduced block reward. As a result, less efficient miners, especially those with higher operational costs, will be financially impacted the most. They may have to reduce their mining activities or cease operations if they cannot sustain profitability. On the other hand, large mining companies, particularly those in the U.S. that typically have lower production costs, are likely to continue operations more comfortably. The halving necessitates that miners maintain low operational costs to endure the reduced inflow of new Bitcoin, ensuring only the most efficient miners remain competitive and productive.

Bitcoin miner incentives will eventually end?

Definitely, as the block subsidy decreases, transaction fees become an increasingly important part of miners’ compensation. Historically, post-halving periods have triggered bull runs, leading to price increases that boost the dollar value of miners’ earnings, compensating for the reduced Bitcoin block rewards. Over the long term, miners will rely predominantly on transaction fees as block rewards trend towards zero. This shift necessitates miners to operate efficiently to remain profitable, especially during periods when prices don’t immediately rise after a halving.

The dynamic within the Bitcoin mining ecosystem is expected to evolve, with transaction fees becoming the primary incentive. This means miners will need to adjust to a market where fees might vary widely based on transaction volume and block space demand. If the demand for transactions remains high, miners can charge higher fees, creating a competitive market for block space.

In terms of Bitcoin’s development, we’ve seen significant activity beyond just transaction processing. The introduction of layer2 solutions and features like Inscriptions and BRC-20 tokens on the Bitcoin network has introduced functionalities typically associated with other blockchain platforms like Ethereum. These developments enhance Bitcoin’s utility and could increase transaction volumes, further influencing miner incentives. This blend of enhanced security, robustness, and new capabilities makes Bitcoin’s network an increasingly attractive platform for developers, potentially leading to more innovative uses and greater demand for the network’s capabilities.

Why do Eastern and Western attitudes towards BRC-20 differ so sharply?

In my experience within the industry, I’ve observed that Asia is generally more open to experimenting with altcoins and engaging in GameFi activities, which explains their enthusiasm for BRC-20 tokens. This openness in Asia contrasts with the more conservative approach in the West, particularly in the US and Europe, where Bitcoin is primarily viewed as a new form of money or a reserve currency — an asset valued for its potential to store value. This fundamental difference in vision shapes how different regions interact with various aspects of the cryptocurrency market.

For instance, in Asia, there is a higher tendency to embrace speculative activities, which is evident from the higher trading volumes in altcoins compared to other regions. This is particularly notable in countries like Korea and Japan. BRC-20 tokens, which are currently mostly used as meme coins, fit well into this speculative and experimental culture prevalent in Asian markets. They offer a form of engagement and entertainment, aligning with the regional preferences for new and diverse crypto experiences.

Furthermore, the regulatory environments in these regions also play a significant role. In Asia, where there might be more stringent capital controls, cryptocurrencies and tokens like BRC-20 offer a way to access more varied and potentially risky assets. This environment fosters a culture that is more receptive to new types of crypto assets, which might be seen as less appealing in markets with different financial norms and regulations.

What is the significance of the Ethereum Dencun upgrade?

Referring to the latest Ethereum upgrade, the Dencun upgrade, it happened a few weeks ago and was aimed at making more space available on the blockchain to store data. This was intended to reduce transaction fees by increasing space for data in blocks, especially beneficial for Layer2 solutions, which are designed for higher transaction throughput. As a result of this upgrade, we saw a significant decrease in transaction fees both on Ethereum and its Layer2s, which supports more efficient operations for DeFi and other applications that benefit from lower fees.

In terms of Ethereum’s supply, the shift from Proof-of-Work to Proof-of-Stake under The Merge in 2022 marked a significant change. This transition not only reduced the rewards but also introduced the mechanism of burning transaction fees. This burning occurs when there is high activity on the network, and the fees generated are permanently removed from circulation. This process inherently reduces Ethereum’s supply, making it a deflationary asset. The sustainability of this trend largely depends on the ongoing activity and usage of the Ethereum network — if the transaction frequency and fees continue to rise, the supply of Ethereum will continue to decrease. We have observed that, since the upgrade, Ethereum’s supply has been gradually decreasing, aligning with the characteristics of a deflationary asset. This outcome aligns with the goals of the upgrade, contributing to a sustainable decrease in supply as long as network activity remains high.

Has the Dencun upgrade met its goals for developers?

The Dencun upgrade for Ethereum was implemented a few weeks ago with the objective of expanding the capacity for data storage within blocks, which aimed to reduce transaction fees, particularly for Layer2 solutions which thrive on higher transaction throughput. This has effectively decreased transaction fees across Ethereum and its Layer2 networks, aligning with our expectations for the upgrade. However, while this upgrade has been technically successful in reducing fees and handling more data, it hasn’t significantly altered the broader investment perspective towards Ethereum, especially when compared to the impact of previous upgrades like The Merge.

In terms of Ethereum’s role compared to Bitcoin, there is a distinct difference in market perception and usage. Ethereum’s shift to Proof-of-Stake was primarily to reduce the environmental impact of mining but also to position itself as having a superior monetary policy compared to Bitcoin’s by being less inflationary. Despite Ethereum’s decreasing supply, which theoretically enhances its value proposition as a ‘store of value,’ it hasn’t significantly shifted its standing or usage in the market compared to Bitcoin. Ethereum is perceived to be underperforming, especially as Bitcoin continues to dominate the investment narrative strongly influenced by its scarcity and role as a reserve asset.

Moreover, the market speculation about Ethereum’s potential spot ETF has been pessimistic, with low expectations for approval this year. This sentiment contributes further to Ethereum’s challenges in altering its narrative within the broader crypto market. In contrast, Bitcoin continues to attract more substantial attention and discussion, particularly with prospects of ETFs in other regions like Hong Kong or Europe, emphasizing the stark differences in market dynamics and expectations between the two leading cryptocurrencies.

How you think about the Stabecoins?

Stablecoins play a crucial role in the cryptocurrency industry by providing liquidity and serving as trading pairs for various transactions. The most significant stablecoins are centralized because they are operated by companies that maintain reserves in banks. This centralization introduces regulatory risks and the potential for governmental interference, which contradicts the decentralized ethos of cryptocurrency. There is a persistent need 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 not tied to traditional finance.

The Ethena project is an example of an innovative approach to creating a stablecoin completely outside the legacy financial system. If executed correctly and on a large scale, this could be a groundbreaking development, offering a stablecoin that embodies the true independence and decentralization sought by the cryptocurrency community. However, this also introduces new risks that must be carefully managed. The goal is to create a stablecoin that maintains its value without being directly linked to the traditional financial assets like the US dollar in the way that major stablecoins like Tether or USDC are.

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

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