Although US ETF products have brought a staggering amount of capital inflows to the market, the spontaneous spot self-holding transactions in the market seem to be suppressing the buyer's pressure, which makes the current market need more non-arbitrage demand to further stimulate prices. In addition to focusing on this, we will continue to explore the divergence between the two seemingly divergent facts of the decrease in active addresses and the surge in the number of transactions.
Summary
With the emergence of the Runes protocol, the number of active transaction addresses in the market has decreased, but the transaction volume has increased. This increase and decrease has formed an obvious and counterintuitive divergence.
Currently, the major entities in the market now hold a staggering amount of assets of approximately 4.23 million BTC, which accounts for more than 27% of the adjusted market supply, while US spot ETFs now hold a total of approximately 862,000 BTC in assets.
Spot and arbitrage trading structures should currently be an important source of ETF inflow demand. At present, these ETF products are used by investors as a tool to obtain long spot exposure, but judging from the situation in the Chicago Mercantile Exchange's futures market, the net short position of Bitcoin futures is now becoming larger and larger.
Divergence in on-chain activity metrics
On-chain activity indicators such as active addresses, transactions, and transaction volume provide a valuable and effective toolset for analyzing the performance and growth of blockchain networks. When China implemented restrictions on Bitcoin Mining in mid-2021, the number of active addresses on the Bitcoin network dropped sharply, from more than 1.1 million per day to only about 800,000 per day.
The Bitcoin network is currently experiencing a similar decline in network activity, although the drivers are entirely different. Below, we explore how the emergence of Inscription, Ordinals, BRC-20, and the Runes protocol have significantly changed on-chain analysts’ views and predictions of future activity indicators.
Figure 1: Bitcoin active address trend
Despite the strong market momentum, with daily active addresses and daily transaction volume seemingly increasing, the trend is deviating from its previous upward path.
In contrast, although the total number of active addresses seems to be decreasing, the transaction volume processed by the entire Bitcoin network is close to a record high. The current average monthly transaction volume is 617,000 BTC/day, 31% higher than the annual average, indicating that the market still has a fairly high demand for Bitcoin block space.
Figure 2: Bitcoin transaction volume trend
If we compare the recent drop in active addresses with inscriptions and the trading share of BRC-20 tokens, we can observe a strong correlation. It is worth noting that the number of inscriptions has also dropped sharply since mid-April.
This suggests that the initial driver of the drop in address activity was primarily due to a decrease in the use of Inscriptions and Ordinals. It is important to note that many wallets and protocols in the industry reuse an address, and if an address is active more than once in a day, it is not double-counted. Therefore, if an address generates ten transactions in a day, it will only appear as a transaction from one active address, rather than ten separate transactions.
Figure 3: Number of Bitcoin Inscription Transactions (14-day moving average)
To illustrate how the inscription industry segment has grown since the beginning of 2023, we can look back at how the cumulative total number of inscriptions has expanded to illustrate this issue. As of this writing, the number of inscriptions has reached 71 million, however, the popularity of the protocol has started to decline significantly since mid-April of this year.
Figure 4: Total number of Bitcoin inscription transactions
Among the various reasons that may have led to the decline in inscription-related transaction activity, we believe that the emergence of the Runes protocol, which claims to be a more efficient way to introduce other homogeneous tokens on Bitcoin, is an important reason for this situation. The Runes protocol was launched on the halving block, which explains why the decline in inscription-related transactions also occurred in mid-April.
The Runes protocol follows a completely different mechanism from inscriptions and BRC-20 tokens. It uses the OP_RETURN field, which is only 80 bytes long, to achieve its function. This function allows the protocol to encode arbitrary data into the chain, and the network space occupied by this encoding process is greatly reduced compared to the previous two protocols.
As the Runes protocol went live at the fourth halving (April 20, 2024), market demand for Runes transactions soared to between 600,000 and 800,000 per day, and the demand has remained high since then.
Figure 5: Daily Bitcoin Transaction Quantity and Type
At present, Runes-related transactions have basically replaced BRC-20 tokens, Ordinals and Inscriptions, accounting for 57.2% of daily transactions. This indicates that collectors' speculation may have shifted from Bitcoin Inscriptions to the Runes market.
Figure 6: Daily Bitcoin transaction volume and type (percentage)
Big Divergence in ETF Demand
Recently, there is another ETF-related disagreement that has also attracted widespread attention in the market - despite the continuous inflow of funds into US spot ETF products, the price has always been stagnant and sideways. In order to determine and evaluate the impact of the ETF demand side in the market, we can compare the ETF assets (862,000 BTC) with the Bitcoin assets held by other major entities of concern:
US spot ETF: 862,000 BTC
Mt.Gox trustee: 141,000 BTC
US government holds: 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 the above entities is approximately 4.23 million BTC, accounting for 27% of the adjusted total circulating supply (the total circulating supply refers to the total supply minus the bitcoins that have been dormant for more than seven years).
Figure 7: Bitcoin holdings of major entities
Among them, the Bitcoin held by Coinbase through its custody service includes a large number of Bitcoin assets belonging to the trading platform assets and US spot ETF assets. The Coinbase trading platform and Coinbase custody entity currently hold approximately 270,000 and 569,000 BTC respectively.
Figure 8: Coinbase Bitcoin Assets
As 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 evaluating the number of "whale wallets" (wallets with more than 100 BTC in assets) that transfer assets to the Coinbase trading platform, we can see that after the launch of the ETF product, the volume of inflows into the trading platform increased significantly. .
But at the same time, we need to point out that a large portion of the Bitcoin assets flowing into the trading platform are strongly correlated with the asset outflow from the GBTC address cluster, which has been one of the long-standing sources of supply in the market supply throughout the year.
Figure 9: Bitcoin whale wallet transactions on the Coinbase platform
In addition to the selling pressure from GBTC as the market rallied to new all-time highs, there is another factor that has led to weakening demand pressure for US spot ETFs in the near term.
Looking at the CME futures market, we note that the total open interest in the market has now stabilized at around $8 billion, compared to a record high of $11.5 billion in March 2024. This may indicate that more traditional market traders are adopting spot arbitrage strategies.
This type of arbitrage involves the exploitation of a market neutral position by combining the purchase of a long spot position with the sale (short) of a futures contract position on the same underlying asset that is trading at a premium in order to ultimately achieve a profit.
Chart 10: CME Bitcoin futures open interest (USD)
From this, we can see that entities classified as hedge funds are building up an increasingly large net short position in Bitcoin.
This suggests that spot carry trades may be a significant source of inflow demand for ETF products, which are essentially vehicles for acquiring long spot exposure. The total open interest of CME has also increased significantly since 2023, allowing CME to establish its dominant position in the market. This position also indicates that it is becoming the preferred venue for hedge funds to short futures through CME.
Currently, hedge funds have a net short position of $6.33 billion and $97 million in the CME Bitcoin futures (single contract is worth 5 BTC) and Micro Bitcoin futures (single contract is worth 0.1 BTC) markets, respectively.
Figure 11: Net positions of various traders in CME Bitcoin futures and Micro Bitcoin futures
Summarize
The divergence between the huge differences in activity metrics has been accelerated by the extremely high adoption of the Runes protocol, which makes heavy use of the address reuse pattern, allowing a single address to generate multiple transactions.
The emergence and large scale of spot arbitrage transactions between long US spot ETF products and short futures through the Chicago Mercantile Exchange have largely suppressed the flow of funds from buyers into ETF products. Even though the impact of this suppression on market prices is currently relatively neutral, this situation also shows that at present, the market needs active buyers brought by non-arbitrage demand to further stimulate the upward trend of prices.