After a short-lived transaction fee frenzy in Q2, mining revenue has normalized back to pre-ordinal levels, but public mining equities have continued to outperform. In February, we covered the introduction of ordinal inscriptions on Bitcoin and their lack of impact on the transaction fee market at the time, but that drastically changed starting in April with the advent of brc-20 tokens and the rush to create tokenomics on Bitcoin. Miners continued to see a large increase in revenue coming from fees throughout the months of April and May, but those numbers have dwindled, leaving mining stocks at local highs.
Block Space Demand & Fee Revenue
Despite the prevalence of ordinal transactions, which constituted over 50% of all bitcoin transactions on Tuesday, the fee revenue related to those types of transactions has significantly dropped since the height of the May frenzy. As of yesterday, non-ordinal based transactions contributed to 85% of the total fee revenue, which in absolute terms, is a small fraction of the numbers recorded during the peak in May.
It’s essential to note that larger-sized transactions by weight in block space terms, such as inscriptions of pictures and videos on the blockchain, weren’t the predominant drivers of ordinal volume. Instead, brc-20 tokens — a simple token standard largely propelled by speculation — were driving the volume. The chart below illustrates the evolution of ordinal usage, with images initially leading the charge, followed by a second wave and peak frenzy driven by brc-20 usage and the indiscriminate demand for immediate block space.
The average weekly fee revenue to miners has drastically fallen from 338.45 BTC/day on May 12, to a meager 17.37 BTC/day yesterday. Meanwhile, the mempool has successfully cleared a substantial portion of the high-fee-paying backlog from two months ago.
We continue to believe that block-space demand for ordinals positively impacts miners and helps drive a high revenue fee market. However, it’s becoming clear that the temporary frenzy we observed two months ago was more of a short-lived phenomenon fueled by hype rather than substance.
The weekly average fee revenue, which once represented 25% of all miner revenue, has dwindled to just 1.75%, using the 7-day moving average. As it stands, miners still derive the majority of their revenue from the block subsidy, which is slated for a 50% reduction in approximately April 2024.
Impressively, despite the contraction in fee market revenue and the fall in hash price (miner revenue per terahash), public miner stocks have soared since the initial ordinals-driven fee spike, showing strong resilience even amidst consolidation in the bitcoin market, hinting at possible strong buy-side flows from institutional capital allocators.
