Bitcoin miners increase capacity though Inscription-fueled transaction fee surge cools ahead of halving

Cipher Mining and Stronghold Digital started the new year by announcing significant expansions in their Bitcoin mining capabilities, scaling up operations in response to changing market dynamics. These developments come as Bitcoin miners adapt to an evolving landscape where transaction fees, bolstered by new technologies like Inscriptions, are increasingly vital in revenue generation.

Bitcoin transaction fees peaked at almost $40 in mid-December, leading to increased revenue for miners, indicating a potential haven ahead of the 2024 halving.

Bitcoin miners earn revenue in two primary ways: by generating new Bitcoin through mining and by collecting transaction fees from processing transactions on the Bitcoin network. As the Bitcoin protocol is designed to halve the mining reward at specific intervals, the importance of transaction fees as a source of revenue for miners increases over time.

When transaction fees increase, this directly boosts miners’ income. For instance, high transaction fees have led to significant gains for Bitcoin miners. A recent surge in transaction fees has been driven by increased network activity, such as the popularity of Ordinals Bitcoin Inscriptions.

The increase in transaction fees is a response to network congestion. As the Bitcoin network becomes more congested with increased mempool size bloat due to the size and volume of Ordinals, users are willing to pay higher fees to ensure their transactions are processed and confirmed promptly. This dynamic creates a market where miners can prioritize transactions with higher fees, thereby increasing their earnings.

The chart below shows the share of blockspace taken up by each data type for Inscriptions, indicating BRC-20 tokens surpassed images around May 2023. BRC-20 tokens use, on average, 60 bytes of space compared to between 300 bytes to 15kb used by images.

In the long term, as the mining reward continues to diminish, transaction fees are expected to become an increasingly important source of revenue for miners. This shift is anticipated to ensure the long-term economic viability and security of the Bitcoin network.

Cipher and Stronghold new miner acquisition.

Cipher Mining Inc. revealed plans for a 60 MW expansion at its Bear and Chief Joint Venture Data Centers, coupled with purchasing 16,700 new Avalon A1466 miners from Canaan. This increase, slated for the…