Author: CryptoVizArt, UkuriaOC, Glassnode
Compiled by: Ladyfinger, BlockBeats
Editor's note: In this in-depth analysis, we focus on several key developments in the Bitcoin market, from the evolution of the technical protocol to macro changes in market structure. Of particular note, while inflows into U.S. spot ETFs are energizing the market, market-neutral cash and carry trading strategies are balancing buyer dynamics, resulting in a more neutral price impact. In addition, the decline in the number of active addresses on the Bitcoin network is in sharp contrast to the surge in transaction volume, and the reasons behind this are thought-provoking. By analyzing the impact of emerging technologies such as the Runes Protocol, we reveal their direct role in the decline in active addresses. At the same time, we also observed that the number of Bitcoins held by major entities and the important role of Coinbase in the market, these factors together shape the current market landscape.
While U.S. ETF inflows have been impressive, the market-neutral cash-and-carry trade appears to be mitigating the push from the buyers, with non-arbitrage demand needed to drive further price gains. At the same time, we are also analyzing the significant difference between the decrease in the number of active addresses and the surge in transaction volume.
BlockBeats Note: Basis trading, also known as cash-and-carry trade, refers to buying (selling) spot bonds and selling (buying) bond futures at the same time. Basis trading strategies trade based on the price difference between an asset in two different markets (such as the price difference between the spot market and the futures market) and can reap rewards if executed correctly. Generally speaking, traders need to manage two different contracts at the same time when executing a basis trading strategy, which is a complicated and lengthy process.
Summary
With the advent of the Runes protocol, there was an unexpected divergence between the decrease in active addresses and the increase in the number of transactions.
Currently, major token 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 vehicles to gain long spot exposure, while net short positions in Bitcoin are accumulating in the CME futures market.
activity differences
On-chain activity metrics, including active addresses, transaction volume, and transaction value, are key tools for assessing the development and performance of a blockchain network. In mid-2021, China imposed restrictions on Bitcoin mining, resulting in a sharp decrease in the number of active addresses on the Bitcoin network, with the average daily active addresses falling from more than 1.1 million to just 800,000.
The Bitcoin network is currently facing a contraction in activity, and the dynamics behind it are very different than in the past. In the following chapters, we will delve into emerging concepts such as inscriptions, ordinal numbers, BRC-20 tokens, and runes, and how they are fundamentally transforming on-chain analysts’ understanding and prediction of future trends in activity indicators.
Real-time data
While historically strong momentum in market pairs has typically been accompanied by increases in active addresses and daily trading volume, there is currently a deviation from this trend.
Although the number of active addresses appears to be decreasing, the Bitcoin network’s transaction processing volume is near all-time highs. The current average monthly transaction volume reaches 617,000 transactions/day, which is 31% higher than the annual average, indicating that the demand for Bitcoin block space is relatively high.
Real-time data
Comparing the recent decline in the number of active addresses with the transaction share of Inscription and BRC-20 tokens, we can observe a strong correlation. Of particular note is the fact 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 primarily due to the reduced use of inscriptions and ordinal numbers. It should be noted 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 is still only counted as an active address in the statistics.
Real-time data
To explain the decrease in Inscription activity, we can focus on the emergence of the Rune Protocol, which claims to be a more efficient way to introduce fungible tokens on Bitcoin. Rune Protocol went live at the time of the block halving, which explains the drop in the number of Inscriptions in mid-April.
Rune uses a different technical mechanism than Inscription and BRC-20 tokens. It utilizes the OP_RETURN field (80 bytes) to encode arbitrary data on the blockchain, thereby significantly reducing the need for block space while maintaining data integrity. needs.
Since its launch on the occasion of the Bitcoin halving on April 20, 2024, Rune Protocol has quickly become popular 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.
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Currently, rune-related transactions account for 57.2% of the daily transaction volume, significantly surpassing BRC-20 tokens, ordinal numbers and inscriptions. This phenomenon suggests that users’ speculative interest may have shifted from inscriptions to the emerging rune market.
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Differences in ETF demand
One issue of particular concern to the market recently is the stagnant sideways price movement despite huge inflows into U.S. spot ETFs. To drill down and assess the demand side of the ETF, we can compare the ETF’s current holdings (862,000 BTC) to other major, tagged entity holdings in the market.
The US spot ETF holdings are 862,000 BTC, Mt. Gox creditors hold 141,000 BTC, the US government holds 207,000 BTC, all exchanges hold a total of 2.3 million BTC, and miners (excluding Patoshi) hold 70.6 Thousands of BTC. The total holdings of these major entities are approximately 4.23 million BTC, accounting for 27% of Bitcoin’s adjusted circulating supply, which refers to Bitcoin that has not been used for more than seven years and is deducted from the total supply.
Real-time data
As a leading cryptocurrency platform, Coinbase controls a large number of exchange assets, and its custody service also manages the Bitcoin holdings of U.S. spot ETFs. It is estimated that Coinbase Exchange and Coinbase Custody currently hold approximately 270,000 and 5.69 million BTC respectively.
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As Coinbase serves ETF customers and traditional on-chain asset holders, it has an increasing influence on the market price formation mechanism. Observing the dynamics of large deposits in the Coinbase exchange wallet, there has been a significant increase in deposit transaction volume after the launch of the ETF.
Most of the deposited Bitcoins are closely related to the continued outflows from the GBTC address group, which has become a key reason for the oversupply of Bitcoin throughout the year.
Real-time data
In addition to the selling pressure brought by GBTC when the Bitcoin market reached a new all-time high, there is another factor that has recently dampened demand for U.S. 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 simultaneously purchasing a long-term spot position and selling (short) a futures contract on the same asset, which is traded due to the presence of a premium.
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Observations show that investors classified as hedge funds are taking increasingly larger net short positions in Bitcoin.
This suggests that basis trading structures may be a key driver of ETF inflows, using ETFs as a way to acquire long-term spot Bitcoin. The CME Group exchange has grown significantly in both open interest and market leadership since 2023, revealing it to be the platform of choice for hedge funds 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.
CME COTs - THE BLOCK
Summarize
The differences between activity metrics have been significantly exacerbated by the popularity of the Rune protocol, which enables a single address to generate multiple transactions through address reuse. At the same time, cash and carry arbitrage between U.S. spot ETF products and short trading through the CME Group exchange effectively offset ETF inflows. This market phenomenon results in a neutral impact on prices, implying that the market requires non-arbitrage natural buying (i.e. real buyers) to drive prices up.
