Bitcoin slides after network congestion leads Binance to briefly halt withdrawals

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Chris Ratcliffe | Bloomberg | Getty Images

Bitcoin fell to start the week, extending losses from a sharp drop over the weekend following reports by one of the biggest crypto exchanges in the world about “congestion” on the Bitcoin network.

The price of bitcoin was lower by about 3.5% at $27,946.39, according to Coin Metrics. It has fallen more than 5% since Saturday. Ether fell more than 2% Monday to $1,861.40.

“Reports of a large bitcoin outflow and withdrawals being paused at a major exchange could be factoring into some of the weakness we’re seeing. Ultimately however, there haven’t been any major developments as far as price action goes, with bitcoin still very much confined to a multiday bullish consolidation,” said Joel Kruger, market strategist at LMAX Group.

“Only a break back below $25,000 would give reason for concern. Until then, we suspect dips will continue to be very well supported,” he added.

Monday’s drop came after Binance tweeted Sunday that the Bitcoin network was “experiencing a congestion issue” and that it was temporarily closing bitcoin withdrawals as a result until the network stabilized. Some market participants have argued that the Bitcoin network is stable and Binance should have prepared for a high-fee environment on Bitcoin.

The issue has highlighted a long known setback of the Bitcoin network: it wasn’t designed to handle a large amount of transactions at scale. It processes just 7 to 10 transactions per second, making it unviable as a major global payment platform – an idea many have explored over the years but largely put to rest. This is why projects like the Lightning Network, which helps speed up transactions without affecting the network, have gained in popularity.

Service on Binance resumed, but later on Sunday evening the exchange again halted withdrawals.

“To prevent a similar recurrence in the future, our fees have been adjusted,” the Binance account tweeted. “We will continue to monitor on-chain activity and adjust accordingly if needed. Our team has also been working on enabling BTC Lightning Network withdrawals, which will help in such situations.”

A ‘parabolic spike’

Alex Thorn, head of firmwide research at Galaxy, noted a “parabolic spike” in transaction fees on the Bitcoin network last week, attributing it to users minting BRC-20 tokens. These are an experimental token on the Bitcoin blockchain that ultimately allow users to create NFTs on Bitcoin. They’re inspired by Ethereum’s ERC-20 token.

“There is an increasing demand for BRC-20 tokens which include transferring digital collectibles on Bitcoin network,” said Oppenheimer analyst Owen Lau. “The Bitcoin network has gradually supported more different types of tokens like NFTs. This adoption should be a positive sign longer term but it looks like it has slowed down the network.”

On May 1, about 50% of bitcoin transactions were BRC-20 mints, Thorn highlighted in a note Friday. In the 14 days preceding Friday, mean transaction fees on Bitcoin increased 297%.