Bitcoin Slips After Network Congestion Causes Binance To Halt Withdrawals

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

The price of bitcoin was lower by about 4% at $27,787.05, according to Coin Metrics. It has fallen more than 5% since Saturday. Ether fell more than 3% on Monday to $1,856.87.

“Reports of a large outflow of bitcoin and withdrawals being paused at a major exchange may be contributing to some of the weakness we’re seeing. Ultimately, however, there hasn’t been much development in terms of price action, with bitcoin still very much limited to a multi-day bullish consolidation,” said Joel Kruger, market strategist at LMAX Group.

“Just a pullback below $25,000 would be cause for concern. Until then, we suspect declines will continue to be very well supported,” he added.

Monday’s drop came after Binance tweeted on Sunday that the Bitcoin network was “experiencing an overload problem” and that it temporarily shut down 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 problem has highlighted a long-known setback in the Bitcoin network: It was not designed to handle large numbers of transactions at scale. It only processes seven to 10 transactions per second, making it unviable as a potential rival to companies like Visa and Mastercard — an idea many have explored over the years but largely put to rest. This is why projects like the Lightning Network, which help speed up transactions without impacting the network, have gained in popularity.

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

“To prevent a similar recurrence in the future, our fees have been adjusted,” the Binance account tweeted. “We will continue to monitor activity on the chain and adjust accordingly if necessary. 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 firm research at Galaxy, noted a “parabolic spike” in transaction fees on the Bitcoin network last week, attributing it to users minting BRC-20 tokens. This is an experimental token on the Bitcoin blockchain that will eventually allow users to create NFTs on Bitcoin. They are inspired by Ethereum’s ERC-20 token.

On May 1, roughly 50% of bitcoin transactions were BRC-20 coins, Thorn highlighted in a note on Friday. In the 14 days before Friday, average Bitcoin transaction fees increased 297%.

“There is a growing demand for BRC-20 tokens that include the transfer of digital collectibles on the Bitcoin network,” said Oppenheimer analyst Owen Lau. “The Bitcoin network has been gradually supporting several different types of tokens such as NFTs. This adoption should be a positive sign in the longer term, but it seems to have slowed down the network.”