Why Bitcoin fees spiked to US$128 after halving

Bitcoin’s most recent “halving” took place on Friday night, with the price of Bitcoin holding steady at approximately $63,907 on April 20th, 2024. Coincidentally, transaction fees have surged dramatically, averaging up to $128.45. This figure sets a new record, which is over seven times greater than the average fees of the previous day, and doubling the previous record set three years ago.

Runes protocol — the culprit behind the rise in fees?

The launch of the Runes protocol was planned to coincide with Halving. While this may initially sound as if the protocol was attempting to steal Bitcoin’s spotlight, it represents a new advancement in the Bitcoin space. Runes protocol creator Casey Rodarmor developed it as a new way to issue fungible tokens on Bitcoins, akin to Ethereum’s ERC-20. This soon enables the creation of various assets like memecoins and governance tokens on the Bitcoin network.

The incredibly fast adoption of Runes led to a rise in Bitcoin’s transaction fees due to higher-than-usual network activity. However, the impact of this standard is gradually diminishing. At the time of writing, Bitcoin’s average transaction fee was close to $30. This decrease could indicate the Bitcoin network’s resilience against abrupt changes to network activity. This resilience actually mirrors Bitcoin’s historical ability to endure transaction surges and fee spikes.

An earlier technology that paved the way for Runes is the Ordinals protocol, which debuted in December 2022. Ordinals brought a groundbreaking cultural movement to Bitcoin by enabling users to embed items such as images, audio, and code files on the Bitcoin blockchain.

Runes represents a natural progression of the Bitcoin ecosystem, addressing the demand among Bitcoin users for functionalities akin to those offered by Ethereum and Solana. Of course, these networks have been the go-to networks for issuing and trading other assets.

Bitcoin fees offset loss in mining revenue

This surge in fees have benefited major Bitcoin mining firms like Marathon Digital Holdings, Core Scientific, and Riot Blockchain, which are now earning record revenues despite the recent halving cutting block rewards by 50%.

Higher transaction fees may also help offset the loss in mining revenue due to Bitcoin’s inevitable halving events. Historically, transaction fees have represented a small portion of Bitcoin miner revenue. However, with the emergence of Ordinals and Runes protocols (and perhaps many more soon), users can use Bitcoin for purposes other than transferring Bitcoin, and thus directing them to bid for higher transfer fees to make token transfers. 

Users don’t normally know or actively manage transfer fee bidding; their wallets typically put up a fee that will guarantee their transaction to be processed on Bitcoin’s network.

Miners typically rely on Bitcoin price rallies to make up for the reduction in block reward. Bitcoin mining can be a very challenging business model, and so many mining companies with inefficient machines couldn’t stay in business for long after each halving. With a more diversified revenue stream, Bitcoin miners can serve the network in other ways, while still being able to secure the integrity of Bitcoin’s transaction history.

As block rewards decrease along with mining revenue, miners will make most of their money from fees. As such there are two possible futures for Bitcoin. If mining machines become increasingly efficient and draw more power from renewable energy, the cost of mining may decrease, which means users won’t be charged higher fees to offset mining revenue from block rewards.

If mining costs remain the same, or increase as efficient miners compete against each other, developers will find alternative ways to off-load user transactions to some sort of side chain before batching them up in a single transaction. This way, each side-chain transaction shares the Bitcoin fee for that single transaction.  

That technology already exists in Bitcoin Lightning, and transactions could be done much faster and cheaper. With the emergence of Runes and even separate networks that use Bitcoin’s blockchain to secure their transactions, it’s entirely possible that the majority of users won’t even use Bitcoin directly, but through side chains that eventually rolls transaction data back to the world’s original blockchain.

Read more about Lightning Network in Beginner’s Guide to Layer 2 Chains

What is Bitcoin halving?

Bitcoin halving is a preprogrammed event that takes place approximately every four years. After each halving, the rate of new Bitcoins entering into circulation decreases by half. From April 2024 to 2028, on average only 450 Bitcoin will be issued every day.

How much Bitcoin will be issued in total is also preprogrammed — about 19.7 million Bitcoins have been issued (mined) out of a total of 21 million that could ever be mined. Given this behaviour, it’s unlikely for Bitcoin’s supply to be fully diluted for the next century.

Meanwhile, what many Bitcoin investors hope for is that with fewer new Bitcoins around to satisfy demand growth, and assuming that demand stays the same if not increasing, Bitcoin’s price will exceed today’s value — as it had done so for the last decade.

Curious about Bitcoin halving? Check out this article: What is Bitcoin Halving? Why It Matters