Ten31 Timestamp 789,857
The bitcoin blockchain was busy this week, as the BRC-20 token frenzy (a new application of the Ordinals protocol that drove a spike in network fees earlier this year) reached a fever pitch. Fees for high priority transactions surpassed 500 sats / vByte for several days early in the week as NFT collectors and wash traders rushed to mint new tokens, presumably in expectation of quick profits. This flurry of activity drove transaction fees on some blocks to actually surpass this epoch’s 6.25 BTC block subsidy, effectively generating total block rewards in excess of last epoch’s 12.5 BTC subsidy, a rare phenomenon not seen in several years. Fortunately, bitcoin was designed to accommodate sudden and sustained spikes in blockspace demand, and the network passed this latest stress test with flying colors, processing an abnormally high backlog of 500,000+ transactions with no downtime. While the remaining backlog is still well above the levels set over the past few years when mempools were consistently clearing, fees have declined back to a more normal 20-50 sats / vByte range, the fee market has forced NFT fans to directly bear the cost of their hobby, and the network continues performing as expected.
While we fully expect more crazes like this one to pop up in the near future, this episode provides an encouraging object lesson for where bitcoin’s blockspace market might be heading. If a relatively niche contingent of NFT enthusiasts are willing to drive transaction fees up beyond the block subsidy just for the chance at minting the latest memecoin, we find it hard to see why a robust blockspace market wouldn’t develop as bitcoin adoption permeates large, multinational enterprises and nation-states, and as more applications are built on top of bitcoin’s base layer. To the extent that bitcoin continues to gain users and demand for economically dense settlement transactions, we expect fees to use the network’s scarce blockspace to increase accordingly – said another way, fees are designed to pump forever. In our view, this past week has hammered another nail in the coffin of bitcoin “security budget” FUD (though we’re admittedly not optimistic the narrative will stay dead for long).
Portfolio Company Spotlight
Start9 provides software and hardware to empower users to easily take control of their digital lives by self-hosting their own personal servers independent of third parties. With intuitive mass market software and one-click installations of popular programs like Bitcoin Core, Mempool.space, various lightning implementations, and 30+ other services, Start9 enables a move away from the current computing paradigm of custodial services that limit privacy, data integrity, and censorship resistance. The company’s exciting roadmap aims to do for personal servers what Microsoft and Apple did for personal computing, which we expect to become progressively more valuable over the coming decades as financial and tech counterparties become less reliable.
Selected Portfolio News
Giga Energy announced a Joint Venture with Atlas Power to identify and develop new bitcoin mining sites powered by flare gas:
Coinkite launched Edge firmware for the Coldcard, a parallel firmware release allowing users to test experimental features:
Fold extended the timeline for using earned Spins to seven days:
The Mempool.space team sat down with Matt Odell on Citadel Dispatch to dig into bitcoin mempools and transaction fees.
Strike CEO Jack Mallers discussed the bitcoin regulatory environment with CoinDesk.
Cathedra COO Drew Armstrong joined the Blockware Intelligence podcast to discuss the mining environment and Cathedra’s strategy.
April’s CPI reading came in at 4.9%, roughly in line with expectations. The figure was the lowest since April 2021.
The Fed’s Senior Loan Officer Opinion Survey (SLOOS), a popular quarterly metric for tracking US lending activity, again showed both weaker demand for loans and tighter standards from loan officers, with figures approaching lows from the 2008-09 recession.
Evidence of banking stress continued this week, as emergency bank lending totaled over $92 billion, up week/week (excluding the prior week’s loans to facilitate the takeover of First Republic).
After some reprieve early in the week, PacWest Bank’s stock declined another 20%+ on Thursday after the bank disclosed it lost 10% of deposits in the prior week.
Political posturing around the impending June 1 debt ceiling deadline continued throughout the week, pushing credit default swaps spreads on US debt to record highs.
Treasury Secretary Janet Yellen rejected the notion that the Treasury would prioritize interest and principal payments over other spending in the event of a failure to raise the debt ceiling, ostensibly setting up an “all or nothing” scenario for US government payments.
The picture overseas didn’t look much better, with one analyst suggesting that European commercial real estate could be in for a 40% correction. On that theme, massive Swedish landlord SBB halted its dividend, and JP Morgan CEO Jamie Dimon acknowledged the challenging CRE backdrop “may take a few banks down.”
On the back of rapidly decelerating macro indicators, ongoing banking stress, and an approaching debt ceiling standoff, the market is now pricing in no further Fed rate hikes.
Bitcoin transaction fees remained near two-year highs for much of the week amid the BRC-20 token craze, with high priority rates often surpassing 500 sats / vByte. However, fees declined substantially to the 20-50 sat / vByte range later in the week.
The recent sudden spike in on-chain transaction fees prompted Binance to commit to implementing lightning withdrawals, a feature long requested by users.
The Texas House of Representatives passed HJR 146, which would add language protecting the right to transact in bitcoin (as well as gold and cash) to the state constitution.
The Texas Senate’s Business and Commerce Committee also passed HB 1666, which aims to institute Proof of Reserves requirements for bitcoin custodians.
Bitcoin held on exchanges reached a 5+ year low this week.
The bankruptcy judge presiding over the BlockFi case ruled that users cannot be paid $375 million of funds held in the company’s interest-bearing accounts.
Additionally, the IRS filed claims worth $44 billion in the FTX bankruptcy and could receive priority over the claims of other creditors in the case. Both episodes highlight once again the risks of custodians and services that promise “yield” on bitcoin.
Recently launched Nostr client Primal open-sourced its caching service.
Publicly traded bitcoin miner Marathon announced a JV with a sovereign wealth fund in Abu Dhabi to develop the Middle East's first large-scale immersion bitcoin mining operation.
The Ethereum blockchain underwent two lengthy interruptions in 24 hours this week.
Ten31 / Unchained Institutional Investor Event @ Bitcoin 2023, May 17
This afternoon event in South Beach will feature panels and networking with founders and operators from many Ten31 portfolio companies. Please reach out if you would like to attend.
Bitcoin 2023, May 18-20
Nashville Ten31 Tribe event, June 14
Nashville Lightning Summit, July 13-14