Bitcoin’s (BTC) high fees caused mining revenues to surge to bull market levels, but not for long

Bitcoin (BTC) miners, battered by the brutal crypto winter of 2022, are reaping record earnings as transaction fees on the network surge to their highest levels in two years.

A miner’s revenue is made up of two components: block rewards, which are currently fixed at 6.25 BTC ($175,000), and transaction fees, which vary based on network demand. Traditionally, or at least since 2017, fees have been lower than rewards.

Ordinal numbers allow labeling of non-fungible tokens and creation of bitcoin-backed fungible tokens, known as BRC-20. These tokens were used to create meme coins, which have seen massive increases in value over the past week or so.

On Tuesday, transaction fees for Bitcoin accounted for 75% of the current block reward, currently 6.25 BTC, versus the usual 2% to 5%, said Tim Rainey, treasurer at Greenidge Generation Holdings (GREE). “This is roughly equivalent to the increase in mining revenue if the Bitcoin price rose to $50,000 from the current $28,000,” he said.

Bitcoin price was last seen around $50,000 in the 2021 bull market as miners raked in record margins. However, margins disappeared very quickly, in 2022 after Bitcoin collapsed, energy costs skyrocketed and capital markets virtually stopped providing new funds.

“The last two days (Sunday and Monday) have been Cipher’s highest-selling days in a row. We mined about 21 bitcoins on Sunday and about 24 bitcoins on Monday,” the company’s CEO, Tyler Page, told CoinDesk.

However, the unexpected surge in revenue may not last long as users are already looking elsewhere for their transactions due to the high fees.

According to TeraWulf (WULF) Chief Strategy Officer Kerri Langlais, this trend is only expected to continue for about another week.

For example, the use of the Lightning Network, a layer 2 solution for transaction processing, as well as stablecoins has led to a surge in transactions in some regions. However, according to Wolfie Zhao, head of research at TheMinerMag, the increase in profitability is not enough to induce miners to dust off their older mining computers to relieve the network.

“The hype [around Ordinals] may not be sustainable” and fees are already down 60-70% from their peak, but it’s possible that as use cases demand more block space, fees will also increase, according to Charles Chong, senior manager of business development at Foundry . The company operates the world’s largest mining pool and is owned by CoinDesk’s parent company, Digital Currency Group.

Ethan Vera, chief operations officer at mining services company Luxor Technologies, said that even if the hype dies down, “there will be higher underlying demand for the mempool, resulting in higher transaction fees for miners.” Mempools are essentially waiting rooms for bitcoin transactions.

The sudden increase in fees has also put mining pools to the test, as their revenue mix has changed drastically.

According to TheMinerMag’s Zhao, about 17-25% of their revenue contribution in May came from transaction fees, as opposed to the 1-3% range seen for the rest of 2023.

According to Foundry’s Chong, this unexpected change will result in pools having to hold more bitcoin reserves. “For FPPS [full pay per share] This means they need to hold more BTC reserves as the luck component of the pool is compounded by the high fees. That means if a pool is unlucky during that period, it suffers a bigger loss by paying miners for the fees it didn’t collect,” he said.

FFPS pools, the method Foundry USA also uses for payouts, share transaction fees with miners based on how much hash rate they contribute, based on an estimated average transaction fee for a given period. “This means the pool has to keep more bitcoins in reserve in case it’s unlucky and doesn’t win enough blocks with enough revenue to cover user withdrawals,” explained Colin Harper, head of content and research at Luxor.

At the same time, congestion and rapid changes in the mempool pose a challenge for the pools’ technology, as they “must quickly adjust the order of transactions and maximize the fee premium for customers,” Chong added.

One possible bright spot of this short-lived phenomenon is that there is a glimpse of the future of bitcoin miners when, sometime around 2140, the bitcoin network will stop issuing block rewards and miners will then only bring in transaction fees.

“Ultimately it is up to the market to decide on the sustainability of this new application [Ordinals]“We view this as a positive long-term development for Bitcoin’s security budget, as block rewards will eventually cease and miners will rely solely on transaction fees for compensation,” wrote Bill Papanastasiou, an analyst at investment bank Stifel GMP, in a research note.

The transaction fee debacle also shows the importance of miners to the integrity of the entire network.

“Without mining, there is no BTC,” and miners will be well rewarded going forward as Bitcoin usage increases, TeraWulf’s Langlais said.

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