On this week’s episode of Galaxy Brains, I talked with Natalia Li (Galaxy Public Policy) about major political and regulatory developments. Christine Kim interviewed Galaxy CEO Mike Novogratz on the latest episode of Infinite Jungle and I highly recommend you listen.
In the newsletter, we write about David Sacks’ major crypto press conference, Hester Peirce’s latest missive from the SEC, bitcoin’s pool of pending transactions (mempool) emptying for the first time in 2 years, and Tether’s latest financials.
Have a great weekend,
Alex
Market Update
Data via Messari as of 7:00PM 2/6/25
The total implied network value (market cap) of the digital assets market stands at $3.25tn, down 12% from last week (when it stood at $3.7tn). Bitcoin’s network value is 9.9% of gold’s market cap. Over the last 7 days, BTC is down 7.7%, ETH is down 17%, and SOL is down 20%. Bitcoin dominance is 61.6%, up 214 basis points from last week.
Stories of the week
001
🏀 Hester Peirce & David Sacks Move the Ball Forward
Hester Peirce releases crypto statement as David Sacks holds press conference with key members of Congress. On Tuesday, SEC Commissioner Hester Peirce released a statement explaining her view of the Commission’s approach to crypto. Almost concurrently, White House Crypto & AI Czar David Sacks held a press conference at the Capitol with key congressional committee chairs, with the group reiterating that crypto is a major administration and legislative priority and calling for ongoing cooperation between the committees, chambers, and branches of government.
The press conference commanded market attention on Tuesday, with Bitcoin recovering all of its tariff-news-induced weekend losses and trading higher into the event — as high as $102k. The press conference was historic and showcased an eagerness to advance crypto priorities from key stakeholders across committees, chambers of Congress, and branches of government. However, the lack of net new, specific details led traders to derisk during and after the event, with BTC falling back into the $97-98k range. Notably, when Sacks was asked if the newly proposed sovereign wealth fund would own bitcoin, he responded that it would be up to Commerce Secretary Howard Lutnick while reiterating that President Trump has tasked his working group with determining if it is “feasible to create a Bitcoin reserve or some sort of digital asset stockpile.”
At about the same time on Tuesday but with much less fanfare, SEC Commissioner Hester Peirce released a statement outlining her views on the path forward for a new SEC that wants to reform and alter its approach to regulation, litigation, and enforcement in the digital assets ecosystem. Titled “The Journey Begins,” Peirce’s piece offers ideas for how the agency may approach various key issues across 10 bullet points.
Our Take
David Sacks’ press conference was undoubtedly historic and was another data point clearly signaling that this government and Congress intend to make crypto a priority. All parties expressed interest in working together to advance crypto legislation and expressed confidence that things like market structure and stablecoins would advance in the coming months and years. Notably, Sacks made a point to refer to both the “Bitcoin reserve” and “digital asset stockpile” as two distinct concepts (and reiterated the distinction a few hours after during a CNBC appearance).
Sacks also said stablecoin legislation is a high priority that Congress “could do in the next six months.” That timeline is positive but also ambitious. Setting aside the question of whether there’s enough floor time in a Congress that needs to complete budget reconciliation to fund the government and also has other priorities like immigration and taxes, stablecoin policy is also more complicated than many acknowledge. It’s true that the Congress is making quick work on stablecoins and we are cautiously optimistic that the two parties aren’t terribly far apart on the legislation. But understanding, incorporating, and mitigating the risks stablecoins might pose to the commercial banking system is a serious and complicated issue. If done incorrectly, stablecoins (which are obviously far superior to the current fiat payment system in many ways) could pose disintermediation risks to banks and have the potential to accelerate capital flight in times of stress.
Despite the historic nature of the press conference and the market’s fixation on it, Hester Peirce’s statement was the most important piece of crypto news on Tuesday. In a new statement titled “The Journey Begins,” Peirce shared a lot of insight into the Commission’s plans, priorities, and attitudes on major crypto regulatory matters including: the Commission’s approach to ongoing and future litigation and enforcement matters; the future (and past) process for token issuance; broker/dealer rules and involvement in digital assets; tokenization and the intersection of crypto and tradfi; and much more. Peirce has long been a prolific and thoughtful advocate for a clearer and fairer approach to crypto regulation at the SEC and the industry is extremely lucky that she is now in a driver’s seat on the issue.
Broadly, while the market remains frenetic and some amount of the anticipated changes in government’s approach to crypto has already been priced in, these events this week were historic, remarkably positive, and confirm that the U.S. continues to enter a digital golden era. – Alex Thorn
002
🌀 Bitcoin Mempool Clears After 2 years
Bitcoin's mempool cleared for the first time since January 2023. The mempool clears when the amount of pending Bitcoin transactions in the mempool reaches 0, resulting in the production of non-full blocks. Pending transactions, represented as the amount of vBytes in the mempool, peaked over 500m vBytes in January 2024. By February 2025, this metric dropped to 0 vBytes in the mempool during specific block intervals.
Since the emergence of Inscription transactions in February 2023, Bitcoin blocks had been consistently full, reaching the ~4mb block limit cap. The significant volume of inscription transactions clogged the mempool for over 2 years, with Ordinal and BRC-20 transactions representing 60%-70% of all daily transactions at their peak. As of February 6, 2025, Ordinals, Runes and BRC-20 type transactions represent 20%-30% of daily transactions. From November 21, 2024 to February 5, 2025, the 7-day average for non-financial transactions (Ordinals, Runes, BRC-20s) dropped 73% while the 7-day average for standard financial transactions dropped 16%.
The lack of pending transaction directly impacts Bitcoin's fee rate environment as miners, who are incentivized to fill blocks, are forced to include transactions with as little as 1 sat/vb fees. While the mempool clearing due to a drop in daily transactions is recent, the average Bitcoin transaction fee has remained flat around $1.50 since January 1, 2025.
Our Take
Bitcoin's oldest criticism, the security budget problem, has resurfaced following the recent mempool clearing. The network's security budget, which funds miners' hash power, consists of two components: the block reward (currently 3.125 BTC) and transaction fees. These payments are crucial for miners to cover substantial operational costs, including energy bills, staff, equipment, and infrastructure. However, the security budget faces two significant challenges: the block reward halves every four years, and transaction fees have proven to be historically volatile. This volatility is evident as transaction fees comprised 75% of miner revenue during the fourth halving on April 20, 2024, this figure dropped to 7% just 12 days later. Even during extended periods of high fees, transaction fees typically only account for 10-30% of miner revenue. As the block reward decays quadrennially to zero (which is how Bitcoin’s long term supply remains capped at 21m units), miner revenue will inherently be comprised mostly of transaction fees. If blocks aren’t filled, fees will be low, and some worry that will lead to declining hash rate and jeopardize the Bitcoin network’s security.
Those who disagree with this criticism typically offer two key counterarguments. First, they argue that hashprice, revenue generated per unit of hash, will increase as Bitcoin's price appreciates over time. Second, Bitcoin's evolution from digital gold to a robust platform, marked by the emergence of inscriptions in late 2022, suggests new activity that increases fees for miners. While the future of Ordinals, Runes, and BRC-20s remains uncertain, Layer 2 solutions that rely on Bitcoin's base layer for security and data availability could significantly boost fee revenue. In our Galaxy Research report exploring Bitcoin as a DA layer, we found that a single Bitcoin rollup posting 400kb of state transition data could consume up to 10% of block space every 6 blocks. At 400kb with 10 sat/vByte fees, Bitcoin rollups will be paying around $460k in fees to miners every month. It should be noted that there are other types of Bitcoin L2s like Sidechains that post less intensive data to Bitcoin every block.
Overall, the mempool clearing coupled with transaction fees being stagnant is a reminder that Bitcoin mining needs Bitcoin to evolve into a robust platform for mining to remain a profitable business. In the long-run, miners need high fees and Layer 2s will contribute to that. Until then, miners will seek alternative revenue streams such as signing data center deals for AI/HPC businesses. The increasing trend of large miners signing data center deals highlights that Bitcoin miners are adaptable to market opportunities to remain a functional business. - Gabe Parker
003
🤖 Tether Reveals AI Plans after Record Year in Profits
Tether concludes record-breaking year with over $13bn in net profit, expansion into AI. Tether reported its latest quarterly financials for 4Q24, which included several new all-time achievements including: (i) $13.7bn in net profit for the year including $6.0bn generated in Q4, (ii) group equity surpassing $20bn (+$5.8bn or +42% q/q), (iii) a reserve buffer of over $7bn (+$1bn or +16% q/q), (iv) bitcoin holdings up $3.1bn q/q to $7.9bn, (v) userbase expanding to over 400m globally, and (vi) over $23bn of newly issued USDT during the quarter to a total of $137bn. In addition, Tether continued its bitcoin purchases and strategic investments (not counted as part of the stablecoin reserves) and obtained a Digital Asset Service Provider (DASP) license in El Salvador, which now serves as the Group's new headquarters.
Separate from the quarterly performance update, Tether CEO Paolo Ardoino shared in a Tweet on February 4 that Tether's AI Division, Tether Data, is developing a number of AI applications (including AI-powered translation services, voice assistants, and even a Bitcoin wallet assistant) and that Tether will soon launch its own AI SDK platform. "Tether Data's apps will focus on working locally on any device, full privacy, self-custodial (both data and money)", according to Paolo.
Our Take
Tether continues to impress with its latest financial results. With $13bn in net income, Tether would rank among the top 50 most profitable companies in the world (which is even more impressive considering Tether's employee base likely pales in comparison to that of every other company on that list). For 2024, unrealized gains in bitcoin and gold contributed ~$5bn to Tether's record yearly profit. One item worth highlighting from Q4 is that Tether is back on track with its predicted bitcoin purchases at quarter-end, which temporarily fell off after Q1 earlier this year (in May 2023, Tether vowed to invest up to 15% of net operating profits to bitcoin to diversify its reserves - see changes in Tether's bitcoin holdings here).
The world's leading stablecoin issuer is also showing no signs of slowing as it ventures deeper into AI technology, which Tether began to explore in 2023 when the firm acquired a stake in Northern Data Group - a generative AI / high-performance computing company. This latest development with Tether Data adds to an impressive list of new products that Tether has recently rolled out including the launch of USDT0 (a new cross-chain standard for USDT) as well as last week's announcement that USDT will soon be integrated on Bitcoin's Lightning Network (discussed in our prior newsletter). As we eagerly await these new products, it's clear that Tether remains committed to advancing crypto and transforming finance as we know it. - Charles Yu
The digital asset industry is on the verge of a golden era. Crypto in America is likely to experience a refreshed regulatory approach—coupled with new majorities of supporters in both chambers of Congress and in the White House.
2024 saw a monumental shift for Bitcoin and digital assets. New products, record inflows, monumental policy shifts, growing adoption, and solidification of Bitcoin as an institutional asset marked 2024.
The Digital Asset Investable Universe is your guide to mastering the digital asset industry, its key sectors and entry points, and the convergence of finance, blockchain, and AI.
Alex talks with Natalia Li (Galaxy Public Policy) about recent crypto regulatory news like the executive order, David Sack's congressional press conference, and Hester Peirce SEC content.
February 3 marked the second highest daily amount of collateral liquidations on Aave V3 on Ethereum since inception. In total $198.5 million of user collateral was successfully liquidated as ETH dropped as much as 27% and BTC as much as 10.2% in the wake of tariff induced market volatility. The liquidations came at no detriment to bad debt built up in the application, with its bad debt balance remaining mostly flat. This event underscores the fortitude of Aave as a programmatic DeFi application and the design of its risk parameters.
Of the liquidated collateral, ETH and wrapped bitcoin tokens were the most liquidated at $104.9m and $43.4m worth of liquidations respectively. The magnitude of liquidations across these assets is due, in part, to their shares of use as collateral on the application.
In Other News
SEC dials down crypto oversight, reassigns agency lawyers
Helium Mobile opens waitlist for its free 5G wireless plan
Canadian man charged for exploiting DeFi vulnerabilities in $65M hacking scheme
THORChain to issue equity tokens to battle $200M debt after pausing bitcoin, ether lending
Stripe makes $1.1B crypto bet as it closes on Bridge acquisition
FDIC releases documents related to supervision of crypto-related activities
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