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The security of the Bitcoin network relies on the continuous addition of new blocks to the blockchain, a process that miners are incentivized to undertake. Miners earn their revenue from the transaction fees included in the blocks they mine, as well as from a block subsidy.
The block subsidy is halved every four years, with the most recent halving occurring on April 19, 2024. This subsidy is intended to support miners’ profitability until the fees generated by transaction activity on the Bitcoin network can sustain them.
When the block subsidy is halved, miners may see a reduction in profitability, leading to consolidation in the industry. Miners can counter this by increasing their market share through various means such as upgrading equipment and seeking strategic partnerships. Those miners who have been more profitable in the past and have accumulated significant BTC reserves are better positioned to make these investments.
Some mining operations may become unprofitable, particularly those with high energy costs. Miners are exploring partnerships to balance energy loads, which can enhance the economics of renewable energy projects. How miners manage their energy costs, liquidity, and debt in fiat currency will determine their credit risk.
Following the approval of spot Bitcoin ETFs by the SEC in the United States earlier this year, the price of Bitcoin surged, attracting new institutional investors and increasing transaction volumes. The Lightning Network, a scaling solution for Bitcoin, saw a significant increase in usage in 2023, indicating growth in the network’s utility.
Despite its significance in cross-border flows and recent technological developments, Bitcoin still lags behind other blockchains in terms of transaction fees. Its limited scalability and lack of smart contract capabilities have hindered its growth compared to chains like Ethereum and Solana.
To address these challenges, new functionalities are being introduced into the Bitcoin ecosystem. The Runes protocol and Ordinals inscriptions have led to increased transaction fees, mainly driven by speculative trading. These innovations aim to support tokenization efforts in financial markets and enhance Bitcoin’s utility.
Looking ahead, Bitcoin advocates envision it becoming a global reserve asset and a neutral means of exchange in a network of AI-powered economic agents. However, sustained and stable transaction revenues are essential for the network’s sustainability, making advancements in technology crucial for its long-term success.
Andrew O’Neill, who heads S&P Global’s research on digital assets, emphasizes the importance of understanding the impact of crypto and defi on financial markets. His expertise in this field, combined with a background in investment banking, positions him well to analyze the evolving landscape of digital assets.