Weekly Insights 2: Bitcoin fees now relatively low

Bitcoin fees are currently significantly lower than in recent months. If you've accumulated many small amounts of bitcoin in your wallet by regularly investing with Bits, now might be a good time to consolidate them onto a single bitcoin address. In this weekly insights, we'll explore the pros and cons of this, as well as the upcoming bitcoin halving and zero-knowledge rollups on bitcoin.

Bitcoin fees now relatively low

The costs of conducting bitcoin transactions on the bitcoin blockchain have been exceptionally high at times over the past few months, primarily due to increased network congestion caused by bitcoin ordinals. However, bitcoin fees are currently significantly lower. This presents an opportunity to consolidate multiple incoming transactions into a single transaction.

So, now is a good time to consolidate some small amounts of bitcoin. But what are the exact pros and cons?

Firstly, it's important to understand that bitcoin operates not with bitcoin addresses, but with transactions as its basis. While bitcoin wallets and block explorers display balances in a simple and understandable way, only transactions exist on the bitcoin blockchain. The balance of a specific address is calculated by reconciling all incoming and outgoing transactions for that address.

As a result, a balance on a single address can consist of either a single transaction or multiple transactions on the blockchain. This can happen because you've received bitcoin on that address multiple times.

When you send a balance composed of multiple transactions, multiple transactions may occur on the blockchain. During times of high bitcoin fees, you consequently pay relatively more for such a transaction.

Still not entirely clear? Let's consider a concrete example. Imagine you buy bitcoin monthly for a year using Bits and have it sent to a specific address. After that year, that address will consist of twelve different incoming transactions.

If you then send the entire balance to a new address, indeed, twelve transactions occur behind the scenes. The bitcoins are moved from the twelve incoming transactions they were associated with to a single outgoing transaction directed to the new address. As a result, the bitcoin fees can be relatively high because multiple transactions are effectively taking place.

However, if you subsequently send your balance again, only one transaction occurs. This is because all the amounts of bitcoin were already consolidated from twelve to one incoming transaction. The balance is thus effectively in one place, requiring only one outgoing transaction to move it again. Although they are the 'same bitcoins', the bitcoin fees for this transaction will be lower.

So, the moral of the story is that it can be interesting to consolidate amounts of bitcoin when bitcoin fees are low, as this avoids high transaction costs in the future. And right now it can be done relatively cheap.

Consolidate small pieces of bitcoin

How do you do that then? It's actually quite simple. You simply generate a new address from your wallet where you want to consolidate the bitcoins, and then you send your bitcoins there. Once the transaction is successful, your bitcoins are consolidated, and thereafter, you only have one incoming transaction on one address.

If you're going to consolidate, consider using a Native SegWit address (Bech32), as the bitcoin fees can be up to 80% lower than with traditional addresses. And if you're using an older type of wallet, it may be interesting to create a new wallet with Native SegWit.

So, the advantage is that you avoid future higher bitcoin fees, but what are the disadvantages? In short, consolidating pieces of bitcoin can be detrimental to your privacy. When you send all your pieces of bitcoin to one address, everything is consolidated at that address.

Then, when you send bitcoins to someone, the recipient can see from which address the transaction originated. Through a block explorer, they can also see how many bitcoins you still have at the 'change address'. When making a transaction, the entire balance of an address is used.

To safeguard your privacy, it may be wise not to consolidate all your savings into one address. This way, you prevent others who know your address from gaining insight into your complete financial situation. On the other hand, too many small addresses (transactions) can also be costly and impractical. One possible solution is to distribute your bitcoins across multiple addresses of average size.

Bitcoin halving

According to our halving countdown, the next bitcoin halving is set to occur in 64 days, on April 21, 2024. That's just two months away! This is a significant event, where the block reward is halved.

But how does it work exactly? The halving takes place after every 210,000 blocks. Since, on average, a block is found once every ten minutes, this happens approximately every four years.

Currently, bitcoin miners receive a reward of 6.25 bitcoins for mining a new block. During the halving, this reward will be halved, meaning miners will receive 'only' 3.125 bitcoins for mining a new block. Miners are preparing diligently for the halving, as we discussed in last weekly insights.

Due to the halvings, bitcoin becomes increasingly scarce over time. This will be the fourth halving in bitcoin's history. Below is the issuance schedule.

• First halving: 50 BTC to 25 BTC
• Second halving: 25 BTC to 12.5 BTC
• Third halving: 12.5 BTC to 6.25 BTC
• Fourth halving: 6.25 BTC to 3.125 BTC

Zero-knowledge rollups on bitcoin

In cryptography, a zero-knowledge proof (ZKP) is a method by which one party can prove to another party that something is true without revealing more information than necessary to demonstrate its correctness. In other words, the proof shows that something is true without disclosing all the details to the verifying party.

This concept has been experimented with on various blockchains for some time. Citrea, a project developed by Chainway Labs, is now introducing the first zero-knowledge rollup on bitcoin without requiring changes to the network's consensus rules. The off-chain ZK-rollup utilizes inscriptions and BitVM.

Without delving into the technical details still in the early stages, it appears to be an intriguing development. The ZK-proofs reside on the bitcoin blockchain, leveraging its security and finality. Anyone running a bitcoin node can independently verify them (don’t trust, verify).