Following a recent period of heavy congestion on the bitcoin network, major cryptocurrency trading platform Binance paused withdrawals of the asset. It wasn’t the first time, and though withdrawals soon resumed following a brief pause, many people have been left scratching their heads. Why do such pauses occur? What causes network congestion? And what course of action should retail traders take when a pause is announced?
Why Did Binance Press Pause on BTC Outflows?
On May 8, Binance announced that it had “temporarily closed #BTC withdrawals due to the large volume of pending transactions,” adding that its team was “working on a fix and will reopen $BTC withdrawals as soon as possible.”
As soon as possible, it transpired, was just 2.5 hours later, followed by a second pause and quick resumption. Many users who were either not paying attention or, due to their timezone, fast asleep, wouldn’t have noticed. For others – particularly retail traders or people wishing to use their BTC to cover payments – the news was a major cause for alarm.
When Binance’s processes had gone back to normal, it sought to assuage the concerns of a worried community by adjusting its transaction fees “to prevent a similar reoccurrence in the future.” The platform also noted that it had been working on enabling BTC Lightning Network withdrawals, which would help in such situations in the future.
For the uninitiated, the Lightning Network is a second layer operating on top of bitcoin, designed to lighten the load by enabling vastly increased transaction speed and cheaper fees among participating nodes.
Understanding Network Congestion
So, why does network congestion happen in the first place? Essentially, it’s a result of significantly increased demand for a blockchain’s resources, resulting in slower transaction processing times and higher fees. Congestion can happen when there is a surge in trading activity or a sudden influx of users trying to withdraw their funds simultaneously.
In the case of Binance’s recent pause on bitcoin withdrawals, it was a result of surging activity on the eponymous network, largely caused by bitcoin trading/NFT minting through the Ordinals protocol. This protocol allows users to add text, audio or images to bitcoins [the so-called BRC token standard] and its popularity has played a major part in causing bitcoin transaction fees to soar by 960% since the start of May.
As David Tse, Co-Founder of Babylon Chain and a professor at Stanford University explains, “Withdrawals have been paused in the past because transaction fees have gone up 10-20X. With the recent drastic increase in bitcoin traffic from BRC20 token issuance, many transactions are stuck in the mempool because they are not paying enough transaction fees for the miners to include in a bitcoin block.”
The mempool to which Tse refers is essentially a waiting area for transactions sent to the bitcoin network, where they linger before being accepted in a block. Recently “for perhaps the first time in bitcoin history since 2017, the transaction fees in a block (#788695) have exceeded the reward of a block (6.25 BTC).”
According to Tse, competitively high block space demand is a healthy development as it benefits the bitcoin miners who secure the network. “As the block reward gets halved every 4 years, the bitcoin security budget is reduced unless there is a commensurate increase in transaction fees to incentivize miners to keep the BTC chain secure,” he explains.
Bitcoin, of course, has a fairly limited processing capacity compared to many blockchains. Transaction speed is a weakness rather than a strength, as it can only handle 7 transactions per second without the Lightning Network.
Can Withdrawal Pauses Be Avoided?
Regardless of what leads to them, withdrawal pauses aren’t exactly positive for bitcoin or the crypto industry in general. That said, internet banking accounts regularly go down for maintenance, effectively preventing users from dispatching funds for a short period while the work is carried out. So, it’s not exactly a crypto-specific problem.
Can withdrawal pauses be avoided, though? When network congestion occurs, trading platforms are between a rock and a hard place, so it’s perhaps no surprise they pause or limit withdrawals temporarily to maintain stability and reliability. Halting withdrawals helps lessen the strain on a blockchain network and ensures transactions can be processed more efficiently.
“We cannot avoid withdrawal pauses happening but we can minimize our exposure to risk and uncertainty,” says Brigham Santos, Chief Operating Officer of Lama Technology, a company that provides crypto banking services.
“We can do this by storing only the assets we are going to trade in the exchange and holding the rest in cold storage. This way, we can protect our assets from potential loss due to a prolonged or permanent halt, as well as to hacking or theft. A trading pause can last from five minutes to several hours, depending on the circumstances.”
Network congestion isn’t the only reason platforms might pause crypto withdrawals, though. As Charmyn Ho, Head of Crypto Insights at the Bybit exchange notes, “Centralized exchanges (CEX) have no more control over the digital asset issuers than the NYSE has control over the companies who list their stock for sale. So if a blockchain project decides to upgrade its system, a CEX must pause withdrawals while that happens — there’s no way around it. That said, the risk of withdrawal pauses can be mitigated by using a CEX with established and high-quality business practices, and a large depth of liquidity.”
How Should Retail Traders Respond to a Pause?
If your bank suddenly told you that you couldn’t withdraw your capital, due to a run on its reserves perhaps, you’d be terrified. But crypto retail traders are more accustomed to these pauses, as they have occurred numerous times before. Most stay abreast of platform announcements and network traffic to anticipate withdrawal problems and plan accordingly.
Naturally, having a diversified portfolio can help to mitigate the impact of network congestion on a specific blockchain. Using multiple trading platforms (since it’s unlikely all of them will pause withdrawals simultaneously) is also a smart tactic.
“If you’re well diversified in where you store your digital fortune, you won’t need to worry about being caught out by a withdrawal pause,” explains Charmyn Ho. But there are other points to consider.
“A trading pause can cause a surge in trading activity when the market eventually reopens, which can lead to delays, slippage, or technical issues,” says Brigham Santos. “You may want to wait for the market to stabilize and clear some of the backlog before placing new orders. This can take between 12 to 24 hours after the halt.”
Ultimately, withdrawal pauses on cryptocurrency platforms are nothing new and, providing you follow best practice, you should be able to ride out these choppy waters without undue difficulty. After all, network congestion isn’t expected to go away anytime soon – though innovations like the Lightning Network should help over time.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
