Bitcoins strong performance this year has been largely driven by surging demand through ETFs and Digital Asset Treasuries (DATs), but this price momentum masks a more concerning trend.

In fact, data suggest that network activity has not kept pace with demand for the asset. This divergence creates an opaque outlook for Bitcoins long-term health, particularly as transaction fees, the critical incentive to reward miners for securing the network, remain low.

Digital Gold Narrative Could Backfire

Similar to how a company’s revenue drives value to its share price, fees are expected to drive value for Bitcoins price. With the fourth halving in April 2024, cutting block rewards, fees today account for less than 1% of miner revenues.

CoinMetrics said that this has left miners increasingly reliant on BTC price appreciation. If fees do not rise to compensate for declining issuance, many miners could be forced offline after prolonged drawdowns. This, in turn, would end up jeopardizing the networks decentralization and censorship-resistance.

The centralization of hashpower already looms large, with Foundry commanding 30% of total hashpower and Antpool 18%. While mining pools continue to invest heavily in hardware to maintain dominance, individual miners struggle with profitability, often liquidating their BTC holdings to cover operational costs.

The long-term challenge becomes clearer when considering the 2028 halving, which will reduce block rewards to just 1.5625 BTC. Without higher fee revenue, the risk of miner attrition will rise, and potentially concentrate security into fewer operators.

This structural challenge is compounded by weak demand for blockspace.

Because there isnt much demand for Bitcoins blockspace, transaction fees stay low. This makes it easier and cheaper for everyday users to send money on the network. However, the demand for Bitcoin as an asset, especially from large institutional investors, doesnt translate into more transactions happening on the blockchain itself. Instead, these investors mainly treat Bitcoin as digital gold or a long-term store of value.

Institutional investors buying ETFs and DATs contribute to price but not to on-chain activity, leaving miners without the fee-based incentives needed for long-term security. To address this imbalance, developers are experimenting with native BTC applications that could restore fee revenue to miners instead of offshoring activity to other chains.

Projects like Babylon Genesis Chain, which allows BTC holders to stake with operators securing external proof-of-stake networks, point to how Bitcoin could expand its role beyond passive value storage. Babylons launch in August 2024 temporarily drove fees above $150 per block and sparked demand for blockspace. However, these spikes have proven short-lived, and fee revenue remains low.

Base Layer Starves

The tokenization trend, too, reveals the risks of activity migrating elsewhere: while Coinbases cbBTC has grown rapidly to over 52,000 BTC in supply, largely at the expense of BitGos wBTC, much of this demand occurs outside the Bitcoin base layer. This also generates little fee income for miners.

For Bitcoin to sustain its lofty valuation, CoinMetrics believes that the ecosystem must find ways to stimulate more consistent network activity and create new demand for blockspace and reward miners for their role in securing the chain.