Despite the massive capital inflows brought to the market by US ETF products, spontaneous spot holding transactions seem to be dampening buying pressure, necessitating more non-arbitrage demand to further stimulate prices in the current market. In addition to focusing on this point, we will continue to explore the discrepancy between the decrease in active addresses and the surge in trading volume in the following sections.
Abstract
With the emergence of the Runes protocol, there has been a decrease in active trading addresses in the market, while trading volume has increased. This clear and counterintuitive discrepancy has emerged between the increase and decrease.
Currently, the major entities of interest in the market hold an astonishing amount of approximately 4.23 million BTC, which accounts for over 27% of the adjusted market supply, while US spot ETFs currently hold assets totaling approximately 862,000 BTC.
Spot and arbitrage trading structures are currently expected to be a significant source of ETF inflow demand. Currently, these ETF products are used by investors as tools to gain long spot exposure. However, looking at the situation in the Chicago Mercantile Exchange’s futures market, the net short positions in Bitcoin futures are increasing.
Discrepancy in on-chain activity indicators
On-chain activity indicators (such as active addresses, transactions, and trading volume) provide a valuable and effective toolset for analyzing the performance and growth of blockchain networks. When China imposed restrictions 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.
The Bitcoin network is currently experiencing a similar decline in network activity, although the driving factors are completely different. In the following sections, we will explore how the emergence of Runes, Ordinals, BRC-20, and Runes protocols significantly changes the views and predictions of on-chain analysts on future activity indicators.
Despite the strong market momentum, the daily active addresses and daily trading volume that we observe seem to be continuously increasing, but this trend is deviating from the original upward trajectory. Conversely, while the total number of active addresses appears to be decreasing, the total trading volume processed by the entire Bitcoin network is approaching a historic high. The current average monthly trading volume is 617,000 BTC per day, which is 31% higher than the annual average, indicating a significant demand for Bitcoin block space.
Comparing the recent decrease in active addresses with the trading share of Runes and BRC-20 tokens, we observe a strong correlation. It is worth noting that since mid-April, the number of Runes has also sharply declined. This suggests that the initial driving factor behind the decrease in address activity is primarily due to the decrease in the usage of Runes and Ordinals. Many wallets and protocols in the industry repeatedly use the same address, and if an address is active more than once in a day, it will not be counted multiple times. Therefore, if an address generates ten transactions in a day, it will only be counted as one transaction in an active address, not as ten separate transactions.
To illustrate how the Rune sub-industry has grown since the beginning of 2023, we can look back at how the cumulative total of Runes has expanded to specifically address this issue. As of the time of writing this article, the number of Runes has reached 71 million, however, the popularity of this protocol has started to significantly decline since mid-April this year.
Among the various reasons that may have led to the decrease in Rune-related trading activity, we believe that the emergence of the Runes protocol is a significant factor causing this situation. The protocol claims to be a more efficient way to introduce other fungible tokens on Bitcoin. The Runes protocol went live on the halving block, explaining why the decline in Rune-related transactions also appeared in mid-April.
The Runes protocol follows a mechanism completely different from Runes and BRC-20 tokens, utilizing an OP_RETURN field of only 80 bytes to achieve its functionality. This feature allows the protocol to encode arbitrary data into the chain while significantly reducing the network space occupied by this encoding process.
With the launch of the Runes protocol on the fourth halving day (April 20, 2024), the market’s demand for Runes transactions soared to between 600,000 and 800,000 per day, and this demand has remained high since then.
As of now, Runes-related transactions have largely replaced BRC-20 tokens, Ordinals, and Runes, accounting for 57.2% of daily transactions. This indicates that speculators’ behavior may have shifted from Bitcoin runes to the Runes market.
Another significant discrepancy related to ETFs that has recently attracted widespread attention in the market is the stagnation of prices despite the continuous inflow of funds into US spot ETF products. To determine and evaluate the impact of ETF demand on the market, we can compare the ETF assets (862,000 BTC) with the Bitcoin assets held by other major entities of interest:
US spot ETF: 862,000 BTC
Mt. Gox trustee: 141,000 BTC
US government holdings: 207,000 BTC
Total assets of all trading platforms: 2.3 million BTC
Miners (excluding Patoshi): 706,000 BTC
The total value of Bitcoin assets held by these entities is approximately 4.23 million BTC, accounting for 27% of the adjusted total circulating supply (total circulating supply refers to the total supply minus the assets dormant for more than seven years).
Coinbase holds Bitcoin through its custody service, including a significant amount of assets belonging to exchange platforms and US spot ETF assets. Coinbase trading platform and Coinbase custody entities currently hold approximately 270,000 and 569,000 BTC, respectively.
Given that Coinbase serves both ETF clients and traditional on-chain asset holders, the importance of the trading platform in the market pricing process has become significant. By assessing the number of “whale wallets” (wallets holding assets exceeding 100 BTC) flowing into the Coinbase trading platform, we can see that the volume of funds flowing into the exchange platform has increased significantly after the introduction of ETF products.
However, it is important to note that a large portion of the Bitcoin assets flowing into the trading platform are strongly related to the outflow of assets from GBTC addresses, which have been a long-term source of supply in the market throughout the year.
In addition to the selling pressure from GBTC when the market rebounds to new all-time highs, another factor has recently contributed to the weakening demand pressure for US spot ETFs. Looking at the situation in the Chicago Mercantile Exchange’s futures market, we note that the total value of open positions in the market has now stabilized at around $8 billion, a decrease from the record high of $11.5 billion in March 2024. This may indicate that more and more traditional market traders are adopting spot arbitrage strategies.
This arbitrage involves utilizing neutral positions in the market by purchasing long spot positions and combining this trading behavior with selling (shorting) asset futures contracts on the same underlying at a premium, aiming to ultimately achieve profitability.
As a result, entities classified as hedge funds are building increasingly large net short positions in Bitcoin futures in the Chicago Mercantile Exchange. This indicates that spot arbitrage trading may be an important source of demand for ETF inflows, with these ETF products essentially serving as tools to gain long spot exposure. Since 2023, the total value of open positions in the Chicago Mercantile Exchange has increased significantly, establishing its dominant position in the market. The establishment of this position also indicates that it is becoming the preferred venue for hedge funds to short futures through the Chicago Mercantile Exchange.
Currently, hedge funds’ net short positions in Chicago Mercantile Exchange Bitcoin futures (valued at 5 BTC per contract) and Micro Bitcoin futures (valued at 0.1 BTC per contract) markets are $6.33 billion and $97 million, respectively.
In conclusion, the widespread acceptance of the Runes protocol has accelerated the significant divergence between activity indicators, leveraging the address reuse pattern extensively, allowing a single address to generate multiple transactions. With the emergence of spot arbitrage trading between being long in US spot ETF products and shorting futures in the Chicago Mercantile Exchange and its large scale, the influx of funds into ETF products by buyers is largely suppressed. Although this suppression currently has a relatively neutral impact on market prices, it also indicates that the market needs active buyers driven by non-arbitrage demand to further stimulate upward price trends.
