jakiro
Source: Coin Metrics; Compilation: Bitchain Vision
Core points
Bitcoin exposure demand:The continued capital inflow of spot Bitcoin ETFs and the performance of digital asset treasury tools such as “Strategy” highlights investors’ demand for Bitcoin (BTC) exposure.Although this may lead to a concentration of positions in a few institutions, such products broaden investment channels for traditional investors.
Activity lag:Despite the record highs in Bitcoin’s price, its blocks are not continuing to be at full capacity.Although this allows low-value transactions to be included in the block and improves the accessibility of the network, it also raises concerns about miners’ profitability – transaction fee income is limited, weakening miners’ motivation to maintain network security.
Bitcoin use cases continue to expand:Wrapped BTC products and emerging native Bitcoin applications have created new revenue opportunities for holders and promoted network activity.However, since August 2024, transaction fees have been in a downturn, never exceeding $150.In the long run, fee income needs to play a greater role in maintaining miner power and network security.
1. Introduction
Bitcoin prices have risen sharply, driven by the development of regulated Bitcoin investment vehicles and a series of legislation supporting cryptocurrencies.Despite the improvement in investor security, the sustainability of the underlying network has been ignored.Without considering network activity, Bitcoin’s long-term investment logic is incomplete.
In September 2024, our first Bitcoin Asset Analysis Report highlights the increasingly scarce nature of Bitcoin, its advantages in modern portfolio theory, and the rise of Bitcoin ETFs.Today, the price of Bitcoin has exceeded $124,000, and ETF capital inflows are on the rise.In this update report,We will conduct in-depth analysis on the recent demand for Bitcoin exposure through ETFs and treasury companies, the impact of this demand on network activity, and emerging development trends in the Bitcoin ecosystem in 2025 and in the future.
2. The driving factors for Bitcoin attention
(I) US spot Bitcoin ETF funds continue to flow in
Since the approval of the US spot Bitcoin ETF in January 2024, the market’s attention to it has fluctuated.At present, the total amount of Bitcoin held by Bitcoin ETFs has exceeded 1 million, accounting for more than 5% of the current Bitcoin supply.As Bitcoin prices hit record highs, institutional investors and traditional portfolios have refocused on ETFs, eager to increase Bitcoin exposure.
The increase inflow of Bitcoin ETF funds can be explained from the following aspects:
1. Modern portfolio theory support: This theory believes that investing in Bitcoin can help improve risk-adjusted returns.The low correlation between Bitcoin and gold and stocks can help the investment portfolio achieve diversified allocation and hedge market downside risks.
2. Simplify the custody process: Self-hosting Bitcoin requires a lot of resources to invest in mnemonic management and multi-sign wallet security, while ETFs circumvent these custody complexities.
3. Convenient access channels: Investors can participate in ETF investment through traditional brokerage platforms, without having to access new cryptocurrency exchanges or conduct peer-to-peer trading, which is in line with their existing investment habits.
(II) Strategy’s rise: Leveraged Bitcoin investment tools
Investors seeking higher Bitcoin exposure have begun to focus on listed companies focusing on building Bitcoin treasury, represented by Strategy (NASDAQ: MSTR).
Compared with Bitcoin ETFs, Strategy stocks perform more volatilely, thus bringing higher potential returns to investors.This is thanks to Strategy’s model of increasing Bitcoin through recursive leverage: its stock’s volatility enables it to continuously issue low-interest convertible bonds (experienced investors can hedge such bonds) and use the funds raised to buy Bitcoin.Strategy’s core goal is to increase the amount of Bitcoin (i.e., “BTC earnings”) per common stock outstanding.Investors expect Strategy to continue to increase its Bitcoin holdings, which puts its stock price at a premium to its underlying treasury value.
Currently, Strategy holds more than 628,000 Bitcoins, accounting for 3% of the current Bitcoin supply.For reference, this amount is only 100,000 less than the total amount of Bitcoin held by BlackRock Bitcoin ETF for millions of investors.
Strategy uses the conceptual indicator of “BTC risk” to measure the probability that the value of Bitcoin that supports the issuing bonds falls to the face value of the bond.If the price of Bitcoin falls for a long time, this risk may weaken Strategy’s future financing ability to buy Bitcoin, and even force it to repeatedly reduce its holdings of Bitcoin to fulfill its debt obligations.
3. Is network activity related to Bitcoin demand?
Just as company revenue determines the value of the stock price, transaction fees are also considered as a key factor in determining the price of the token.The handling fee not only reflects the network usage, but also is also the core reward for incentivizing miners to maintain network security.
Passive holding of Bitcoin will reduce network activity and fee income, which will in turn threaten network security.If miners are unable to obtain enough Bitcoin earnings from block rewards and transaction fees, operations may be stopped to avoid losses, resulting in the concentration of computing power to a few operators.By analyzing the changes in fee activity, we can clearly determine whether it is driving the price of Bitcoin to rise.
(I) The dominance of mining pools continues
Since we released the first “Bitcoin Asset Analysis Report”, the control pattern of top mining pools on the final power has remained stable.The American mining pool Foundry controls about 30% of the computing power, followed by the Chinese mining pool Antpool, which accounts for 18%.In order to maximize profits, miners continue to compete for control of computing power and dominance in the network.The current block generation difficulty is at an all-time high, indicating that the mining pool is still investing in new miners to maintain its position in the network.
Bitcoin mining pool proportion chart (August 2024 to present)
(II) Miners’ income is not sustainable
Although mining pools control the network, individual miners’ income dependence on Bitcoin prices is increasing.After Bitcoin’s fourth halving in April 2024, the proportion of transaction fees continued to decline, which is currently less than 1% of miners’ total income.The decrease in the amount of Bitcoin held by individual miners is partly due to operational security concerns, and partly because of the need to sell Bitcoin to cover operational costs.
Bitcoin is expected to usher in its fifth halving in 2028, when miners can only receive 1.5625 new Bitcoin rewards per block.A sharp drop in revenue may cause some miners to exit the market because they are unable to maintain profits.Miners’ exit will pose a threat to Bitcoin’s decentralized nature and cybersecurity.
Against this background, the role of handling fee income in motivating miners to maintain network security and preventing computing power concentration will become increasingly important.To make up for the revenue gap caused by the reduction of Bitcoin block rewards, there are two ways to do it: one is that the surge in network activity drives up handling fees, and the other is to develop new applications to create new demand for block space.
4. The issue of activity lag
Since January 2025, the available amount of Bitcoin block space has increased significantly from the 2024 average.Block Weight is used to measure the scale of transactions included in the block – complex transactions have higher weight and occupy more block space than simple transactions.At present, as long as there is more transaction demand, the block still has enough room to accommodate more transactions.
The sluggish demand for block space has resulted in low fees, which allows many users who are sensitive to fees to participate in online transactions.Although low fees increase the inclusiveness of value transfer in censorship-resistant networks,There is little correlation between the demand for Bitcoin assets and the demand for block space by institutional investors.
Bitcoin is increasingly regarded as a “digital gold” and a store of value tool.Its attractiveness does not stem from the handling fees generated by the Internet, but is the ability to hedge the inflationary pressure of fiat currency and serve as an alternative store of value or transfer.
5. Bitcoin use case development in 2025
(I) Emerging alternatives to encapsulated Bitcoin
Coinbase’s cbBTC supply has increased significantly as BitGo’s packaged Bitcoin (wBTC) is undergoing custody adjustments.Users lock in Bitcoin and obtain tokens representing underlying assets, such as cbBTC and wBTC, thereby finding profit opportunities in other networks.
Although BitGo previously occupied a large part of the tokenized Bitcoin market, the market has raised concerns about its reserve management after it announced in August 2024 that it would cooperate with BitGo Singapore Limited and BiTGlobal to adjust its custody model.Affected by this, the supply of Bitcoin custodials stagnated, with wBTC stable at about 127,000 pieces, down from the total supply of 153,000 pieces last year.
Meanwhile, since its launch in August 2024, the supply of cbBTC has grown to over 52,000 pieces.Although BitGo still hosts most of Bitcoin for users, Coinbase is constantly grabbing market share.
(II) Native Bitcoin applications continue to develop
Developers are actively developing related applications to reduce users’ dependence on custody and cross-chain bridges when using Bitcoin to obtain revenue.Holders can interact with these applications through native Bitcoin without holding tokenized Bitcoins.
Babylon Genesis Chain provides security for external Proof of Stake (PoS) networks by incentivizing miners to stake Bitcoin to operators.Verifying the status changes of the PoS network with the help of the Bitcoin network can not only improve the security of the PoS chain, but also generate additional fee income for Bitcoin miners.While retaining ownership of Bitcoin, Bitcoin stakers can also receive rewards from PoS networks that require operator assistance in verifying network status.
On August 22, 2024, at the beginning of the opening of deposits for the Babylonian pledge business, the demand for block space increased significantly, and the network handling fee once exceeded US$150, setting a new high for single-block handling fee since the integration of OKX Unspended Transaction Output (UTXO) in June 2024. This phenomenon fully reflects the market’s expectations for the Babylonian pledge business.
Since the Babylonian staking business triggered a rise in handling fees, the peak of Bitcoin transaction fees has never exceeded US$150.Unless new factors emerge to prompt users to rush to include transactions into the next block, the proportion of handling fees in miners’ income will continue to remain low.The instability of fee income has forced miners to rely more on newly issued Bitcoin block rewards to maintain operations.
6. Outlook
The growth in Bitcoin demand generated through ETFs and digital asset treasury (DATs) is the main reason for Bitcoin’s strong performance in recent years.However, this demand has not translated into an increase in network activity.
The continued sluggish fee income has made the health prospects of the Bitcoin network unclear.As the number of newly issued bitcoins decreases, the importance of transaction fees in incentivizing miners to maintain network security will become increasingly prominent.If miners are forced to withdraw from the network due to long-term losses, Bitcoin’s decentralized characteristics and censorship resistance will be at risk, and its core value proposition will be lost.
The emergence of more native Bitcoin applications is expected to return the fee income to miners instead of allowing related activities to flow to other blockchains.If Bitcoin wants to match its high valuation, network activity and miner incentive mechanisms must be improved as soon as possible.
