Despite its USD exchange rate remaining below $30,000 since April 19, something interesting has been happening with Bitcoin. While its value remains a long way from the record highs of almost $70,000 set in September 2021, the original and market leading cryptocurrency has recently been establishing new record highs for another important metric – daily transactions.
Bitcoin daily transactions have been spiking since late April, as can be seen on a chart shared on Twitter on May 3 by Pedro Negron, an analyst at blockchain analytics platform IntoTheBlock. Negron points out that the 682k Bitcoin transactions on May 1 not only represented a new record high but surpassed the previous record (before the April 30 total of 568.3k) of 490k transactions in a day by almost 40%. Before the recent spike, the record for daily Bitcoin transactions was set back in late 2017.
High levels of daily transactions, as long as they are not the result of a stampede for the exit door, are seen as a metric of interest in Bitcoin and, as such, an indicator of possible positive future price movement. In this case, the spike in transaction volumes is being put down to a wave of interest in Bitcoin Ordinals, a protocol that expands the Bitcoin blockchain’s use case beyond a cryptocurrency that is traded or held as a, critics would say highly speculative, store of value.
Data from Dune Analytics quoted by Business Insider indicates that a majority 54.6% of the record Bitcoin transactions that took place on May 1 were accounted for by Bitcoin Ordinals. As a result, transactions were large in number but small in value, averaging around just $1 earlier this week. Previous daily transaction records were set with average transaction values of over $1000.
But what is the Bitcoin Ordinals protocol, what new use cases does it provide the Bitcoin blockchain and will current interest prove sustainable, driving new price gains for the dominant cryptocurrency?
Bitcoin Ordinals are similar to NFTs
The Bitcoin Ordinals protocol allows users to embed data into the cryptocurrency’s blockchain in a way that is comparable to minting non-fungible tokens – NFTs.
Source: Chainlink
Ordinals were launched on the Bitcoin mainnet on January 20 of this year by the developer Casey Rodarmor. By March, over 200,000 Ordinals containing images, text and other format had been minted.
Every Bitcoin consists of 100,000,000 satoshis (sats), which can be seen as the crypto equivalent of pennies or cents – but representing much smaller fractions. The Ordinals protocol identifies each satoshi individually and facilitates their transaction with extra data attached. That data could represent a piece of digital art, record of ownership or any of the other assets that NFTs have been used for.
Individual satoshis are given serial numbers based on the order in which they were mined and transferred. While the numbering scheme reflects the order satoshis were mined, the transfer scheme is based on the order of transaction inputs and outputs and the etymological root of the term “ordinals”.
How do Bitcoin Ordinals differ from traditional NFTs?
While there are a lot of similarities between Bitcoin Ordinals and traditional NFTs created on smart contract blockchains, there are also some important differences. NFTs created with smart contracts can represent assets hosted elsewhere. The NFT often acts like a title deed to the actual asset.
In the case of Ordinals, the asset is the data inscribed into individual satoshis which are then included into Bitcoin blocks on its blockchain. This avoids the need for either sidechains or separate tokens and means Ordinals benefit from the simplicity, immutability and security of Bitcoin itself.
How does the inscription that creates Ordinals within satoshis work?
The additional data is added through a process known as an inscription and makes Bitcoin NFTs, until now usually created on smart contract-focused blockchains like Ethereum and Soldano, a reality.
As Binance explains, Ordinals also tap into the psychology of collectables by falling into several categories of rarity based on the total supply of Bitcoin and where in the blockchain the individual Satoshi is stored and was created. The Satoshi tiers are:
- Common: any sat other than the first sat of its block (2.1 quadrillion total supply).
- Uncommon: the first sat of each block (6,929,999 total supply).
- Rare: the first sat of each difficulty adjustment period (3437 total supply).
- Epic: the first sat after each halving (32 total supply).
- Legendary: the first sat of each cycle* (5 total supply).
- Mythic: the first sat of the genesis block (1 total supply).
*A cycle represents the period between conjunctions, which occur when a halving and a difficulty adjustment coincide. In theory, this happens every 6 halvings, but the first conjunction is yet to occur and isn’t expected to until 2032).
Not all Bitcoin advocates are happy about the growing populariy of Bitcoin Ordinals
The positive way of looking at Ordinals is that they give Bitcoin another use case beyond being a store of value, payments and trading. However, there is a significant faction that believes adding new features and use cases to Bitcoin is not desirable and its simplicity should be preserved as a strength.
Ordinals are also competing for block space with traditional Bitcoin transactions which is driving network fees up. That can also be seen positively and negatively. The positive way of looking at it is that higher fees are an incentive to miners, whose work secures the blockchain. The negative interpretation is that higher fees take Bitcoin further way from becoming a genuine alternative to fiat currencies in everyday financial transactions.
The Bitcoin community is split on Ordinals but they have introduced new innovation and a new use case. But is that use case significant enough to drive future gains for the Bitcoin price?
Bitcoin transaction numbers may be high thanks to Ordinals but overall trading volumes are weak
Despite Bitcoin enjoying its longest run of gains in over two years, up almost 75% this year, trading activity has, says the Financial Times, notably dropped. In the early part of the year, crypto investors appeared to be shrugging off a disastrous 2022 that saw prices plunge and a number of the highest profile crypto platforms and lenders collapse. However, Bitcoin has been trapped in a relatively narrow trading range around $28,000 since the second half of March.
Despite the surge in transaction numbers spurred by Ordinals, trading volumes have been thin. A regulatory crackdown in the USA and concerns that more crypto sector firms could still find themselves in trouble after last year’s difficulties appears to be putting capital off returning to the asset class.
Lowering trading volumes also mean the Bitcoin price can be moved more easily, creating volatility. The FT quotes cryto data company CCData, which states the purchase of more than 1,400 Bitcoins, roughly equivalent to $23 million at the time, would have been required to drive the price up by 1% in January. By the second half of April, a 1% move would have required the transaction of just 462 Bitcoins, worth about $13 million.
One of the issues with Bitcoin liquidity is that the role provided by the collapsed exchange FTX and its sister trading company Alameda has yet to be replaced. And that those who bought Bitcoin earlier this year are mainly holding onto it and not trading.
That at least indicates belief in the original crypto’s future but also suggests a nervousness has entered the market and probably won’t lift until there is some evidence on how the regulatory battles with the SEC and other watchdogs will work themselves out.
It is unlikely that Bitcoin Ordinals will, in themselves, represent enough collective value to influence the Bitcoin trading price in the foreseeable future. Significant movement above $30,000 will require a return of broader market confidence. But if it is to return, a popular new use case for Bitcoin may help ease that confidence back.
