Despite the impressive inflows into US ETFs, market-neutral basis trades appear to be mitigating the buyer's impetus, and the market needs non-arbitrage demand to further drive prices higher. At the same time, we are also analyzing the significant difference between the decrease in the number of active addresses and the surge in trading volume.
Summary
With the emergence of Runes protocol, there is an unexpected divergence between the decrease in active addresses and the increase in transaction count.
Currently, major tokenized entities hold a staggering 4.23 million BTC, accounting for more than 27% of the adjusted supply, and US spot ETFs now have a balance of 862,000 BTC.
Basis trade structures appear to be a significant source of demand for ETF inflows, with ETFs being used as a vehicle to gain long spot exposure, while net short positions in Bitcoin have been accumulating in the CME futures market.
Activity Differences
On-chain activity metrics, including active addresses, transaction volume, and transaction value, are key tools for evaluating the development and performance of blockchain networks. In mid-2021, China imposed restrictions on Bitcoin mining, which led to a sharp drop in the number of active addresses on the Bitcoin network, with the average daily active addresses falling from over 1.1 million to just 800,000.
The Bitcoin network is currently experiencing a contraction in activity, and the motivations behind this are very different from those in the past. In the following chapters, we will delve into emerging concepts such as inscriptions, ordinals, BRC-20 tokens, and runes, and how they fundamentally change the way on-chain analysts understand and predict future trends in activity indicators.
While historically strong momentum in a market pair is often accompanied by growth in active addresses and daily trading volume, this trend is currently deviating.
Despite the apparent decline in the number of active addresses, the Bitcoin network is processing transactions close to all-time highs, with monthly averages now at 617,000 transactions per day, 31% higher than the annual average, indicating relatively high demand for Bitcoin block space.
Comparing the recent decline in the number of active addresses with the share of inscriptions and BRC-20 token transactions, we can observe a strong correlation. It is particularly noteworthy that the number of inscriptions has also shown a sharp downward trend since mid-April.
This suggests that the decline in the number of active addresses is mainly due to the reduced use of inscriptions and ordinals. It is important to note that in this space, many wallets and protocols reuse the same address, and if an address has multiple activities in a day, it will not be counted multiple times. Therefore, even if an address generates ten transactions in a day, it will still only be counted as one active address in the statistics.
To explain the drop in inscription activity, we can look to the emergence of the Rune Protocol, which claims to be a more efficient way to introduce fungible tokens on Bitcoin. The Rune Protocol went live at the time of the block halving, which explains the drop in inscriptions in mid-April.
Runes use a different technical mechanism from inscriptions and BRC-20 tokens. They use the OP_RETURN field (80 bytes) to encode arbitrary data on the blockchain, thereby significantly reducing the demand for block space while maintaining data integrity.
Since its launch on April 20, 2024, when Bitcoin was halved, the Rune Protocol has quickly gained popularity in the market, with daily transaction demand increasing to 600,000 to 800,000 transactions, and the transaction volume has remained at a high level since then.
Currently, rune-related transactions account for 57.2% of daily trading volume, significantly surpassing BRC-20 tokens, ordinals, and inscriptions. This phenomenon suggests that users' speculative interest may have shifted from inscriptions to the emerging rune market.
Differences in ETF demand
One of the issues that has attracted particular attention in the market recently is that despite the huge inflows of funds into US spot ETFs, the price has stagnated and moved sideways. To further analyze and evaluate the demand side of ETFs, we can compare the current holdings of ETFs (862,000 BTC) with the holdings of other major, tokenized entities in the market.
US spot ETFs hold 862,000 BTC , Mt. Gox creditors hold 141,000 BTC , the US government holds 207,000 BTC , all exchanges hold 2.3 million BTC , and miners (excluding Patoshi) hold 706,000 BTC . The total holdings of these major entities are about 4.23 million BTC, accounting for 27% of the adjusted circulating supply of Bitcoin, which means that Bitcoin that has not been used for more than seven years is deducted from the total supply.
As a leading cryptocurrency platform, Coinbase controls a large amount of exchange assets, while its custody service also manages the Bitcoin holdings of the US spot ETF. It is estimated that Coinbase Exchange and Coinbase Custody currently hold approximately 270,000 and 5.69 million BTC respectively.
Coinbase has an increasing influence on the market price formation mechanism because of its service to ETF customers and traditional on-chain asset holders. Observing the dynamics of large deposits in the Coinbase exchange wallet, the deposit transaction volume has increased significantly after the launch of ETF.
Most of the deposited Bitcoin is closely related to the continued outflow from the GBTC address group, and this phenomenon has become a key reason for the excess supply of Bitcoin throughout the year.
In addition to the selling pressure brought by GBTC as the Bitcoin market hit a new all-time high, there is another factor that has recently dampened demand for US spot ETFs.
Looking at the CME Group futures market, open interest reached a record high of $11.5 billion in March 2024 and has since remained above $8 billion. This trend may reflect the increasing use of cash and carry arbitrage strategies by traditional market participants.
This arbitrage strategy takes a market-neutral stance and involves the simultaneous purchase of a long spot position and the sale (short) of a futures contract for the same asset, the latter being the subject of a trade due to the presence of a premium.
Observations show that investors classified as hedge funds are building an increasingly large net short position in Bitcoin.
This suggests that basis trade structures may be a key driver of ETF inflows, using ETFs as a way to gain long spot Bitcoin.Since 2023, CME Group exchanges have seen significant growth in both open interest and market leadership, revealing themselves as the preferred platform for hedge funds to short futures.
Currently, hedge funds hold a net short position of $6.33 billion in the CME Bitcoin futures market and a net short position of $97 million in the Micro CME Bitcoin futures market.
Summarize
The difference between activity indicators is significantly exacerbated by the popularity of the Rune Protocol, which enables multiple transactions from a single address through address reuse. At the same time, cash and carry arbitrage between US spot ETF products and short shorts conducted through CME Group exchanges effectively offset the inflow of ETF funds. This market phenomenon has caused the impact on prices to become neutral, suggesting that the market needs natural buying (that is, real buyers) of a non-arbitrage nature to drive prices up.
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