Authors: CryptoVizArt, UkuriaOC, Glassnode
Translation: Dengtong, Golden Finance
Summary
– The appearance of the Runes protocol has created an counterintuitive discrepancy between the decrease in active addresses and the increase in transaction volume.
– Major token entities hold an astonishing approximately 4.23 million BTC, accounting for over 27% of the adjusted supply, with the US spot ETF currently holding a balance of 862,000 BTC.
– Spot and hedging trading structures seem to be a significant source of ETF inflow demand, with ETFs being used as tools to obtain long spot exposure, while the net short position of Bitcoin in the Chicago Mercantile Exchange Group futures market continues to grow.
Decrease in active addresses and increase in transaction volume
On-chain activity indicators such as active addresses, transactions, and transaction volume provide valuable tools for analyzing the growth and performance of blockchain networks. When restrictions were imposed on Bitcoin mining in mid-2021, the number of active addresses on the Bitcoin network plummeted from over approximately 1.1 million per day to just around 800,000 per day.
Currently, the Bitcoin network is experiencing a similar contraction in network activity, although the driving factors are entirely different. In the following sections, we will explore how the emergence of inscriptions, Ordinals, BRC-20, and Runes has significantly altered the outlook of analysts on future activity indicators.
Despite the strong market momentum with increasing active addresses and daily transaction volume, there is a deviation occurring in this trend.
While active addresses seem to be decreasing, the transaction volume being processed by the network is close to historic highs. The current average daily transaction volume is 617k, 31% higher than the annual average level, indicating a relatively high demand for Bitcoin block space.
If we compare the recent decline in active addresses with the trading share of inscriptions and BRC-20 tokens, we can observe a strong correlation. It is worth noting that the number of inscriptions has also sharply declined since mid-April.
This suggests that the initial driving factor behind the decrease in address activity is primarily due to the reduced usage of inscriptions and Ordinals. It is important to note that many wallets and protocols in the industry reuse addresses, and if an address is active more than once in a day, it is not counted multiple times. Therefore, if an address generates ten transactions in a day, it will be counted as one active address, but there were actually ten transactions.
To illustrate how the number of inscriptions has grown since early 2023, we can see how the total number of inscriptions has expanded. As of the time of writing this article, the number of inscriptions has reached 71 million, however, the popularity of the protocol has significantly declined since mid-April this year.
To explain the decline in inscription activity, we must emphasize the emergence of the Runes protocol, which claims to be a more efficient way to introduce alternative tokens on Bitcoin. Runes was launched on a halving block, explaining the decline in inscriptions in mid-April.
Runes follows a different mechanism than inscriptions and BRC-20 tokens, utilizing the OP_RETURN field (80 bytes). This allows the protocol to encode arbitrary data into the chain while requiring less block space.
With the launch of the Runes protocol at the halving on April 20, 2024, demand for Runes transactions surged to between 600,000 and 800,000 per day, remaining high thereafter.
Rune-related transactions have now largely replaced BRC-20 tokens, Ordinals, and inscriptions, accounting for 57.2% of daily transactions. This indicates that speculative behavior among collectors may have shifted from inscriptions to the Rune market.
Divergence in ETF demand
Another recent discrepancy that has garnered attention is the stagnation in price despite the remarkable inflow of the US spot ETF, consolidating. To determine and evaluate the demand side of the ETF, we can compare the ETF balance (862k BTC) with other major entities.
US spot ETF = 862k BTC
Mt. Gox Trustee = 141k BTC
US government = 207k BTC
All exchanges = 2.3 million BTC
Miners (excluding Patoshi) = 706k BTC
The total balance of all these entities is estimated to be around 4.23 million, accounting for 27% of the overall adjusted circulating supply (i.e., total supply minus tokens idle for over seven years).
Coinbase as an entity holds a significant total exchange balance through its custody services, as well as the US spot ETF balance. Coinbase Exchange and Coinbase Custody entities currently hold approximately 270,000 and 569,000 BTC, respectively.
Since Coinbase serves both ETF clients and traditional on-chain asset holders, the importance of the exchange in the market pricing process has become increasingly significant. By evaluating the number of whales depositing funds into Coinbase Exchange wallets, we can see a significant increase in deposit transaction volume after the ETF launch.
However, we note that a large portion of deposits is related to the outflow of the GBTC address cluster, which has been a long-standing supply expense throughout the year.
In addition to the selling pressure on GBTC when the market rebounds to new highs, there has recently been a factor contributing to the weakening demand pressure for the US spot ETF.
Looking at the Chicago Mercantile Exchange Group futures market, open interest contracts have remained stable at over $8 billion, previously hitting a record high of $11.5 billion in March 2024. This may indicate that more traditional market traders are adopting spot arbitrage strategies.
This arbitrage involves a market-neutral position, combining the purchase of long spot positions with the sale (shorting) of futures contracts on the same underlying asset at a premium.
We can see that entities classified as hedge funds are building increasingly large net short positions in Bitcoin.
This suggests that the spot arbitrage trading structure may be a significant source of ETF inflow demand, where ETFs are tools to obtain long spot exposure. Since 2023, the open interest contracts and overall market dominance of the Chicago Mercantile Exchange Group (CME Group) have significantly increased, indicating it is becoming the preferred venue for hedge funds to short futures through CME.
Currently, hedge funds’ net short positions in the Chicago Mercantile Exchange Bitcoin (CME Bitcoin) and Micro Chicago Mercantile Exchange Bitcoin (Micro CME Bitcoin) markets are $6.33 billion and $97 million, respectively.
In conclusion
The extreme popularity of the Runes protocol has accelerated significant discrepancies between activity indicators, utilizing a large amount of address reuse where a single address generates multiple transactions.
The appearance and scale of spot arbitrage trading between long US spot ETF products and short futures at the Chicago Mercantile Exchange have largely suppressed the flow of funds into ETFs by buyers. This has a relatively neutral impact on market prices, indicating the need for organic buyers from non-arbitrage demand to further stimulate positive price action.
