Despite the tremendous capital influx brought into the market by US ETF products, the spontaneous spot trading seems to be suppressing buying pressure, necessitating more non-arbitrage demand to further stimulate prices. In addition to this observation, we will continue to explore the discrepancy between the decreasing number of active addresses and the increasing trading volume in the market.
With the emergence of the Runes protocol, there has been a decrease in the number of active trading addresses in the market, while trading volume has increased. This apparent contradiction between the increase and decrease is evident and counterintuitive.
Currently, the major entities of interest in the market hold an astonishing amount of approximately 4.23 million BTC, accounting for over 27% of the adjusted market supply, while US spot ETFs currently hold assets totaling around 862,000 BTC.
Spot and arbitrage trading structures are currently expected to be significant sources of ETF inflow demand. Currently, these ETF products are being 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 becoming increasingly significant.
Divergence in On-Chain Activity Indicators
On-chain activity indicators such as active addresses, transactions, and trading volume provide valuable and effective tools for analyzing the performance and growth of the blockchain network. As China implemented restrictions on Bitcoin mining in mid-2021, the number of active addresses on the Bitcoin network sharply declined from over approximately 1.1 million per day to only 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 discuss how the emergence of the Runes protocol, Ordinals, BRC-20, and others has significantly altered the views and predictions of on-chain analysts regarding future activity indicators.
Despite the strong momentum in the market, the daily observed active addresses and daily trading volume seem to be continuously increasing, but this trend is deviating from the original upward trajectory.
In contrast, while the total number of active addresses seems to be decreasing, the total trading volume processed by the entire Bitcoin network is approaching historical highs. The current average monthly trading volume is 617,000 BTC per day, 31% higher than the annual average, indicating a significant demand for Bitcoin block space in the market.
If we compare the recent decrease in active addresses with the trading volume of Runes and BRC-20 tokens, we can observe a strong correlation. Since mid-April, there has been a sharp decrease in the number of Runes transactions.
This indicates that the initial driving factor behind the decrease in address activity is primarily due to the reduced usage of Runes and Ordinals. It is worth noting that many wallets and protocols in the industry reuse an 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 Runes protocol has grown since the beginning of 2023, we can look back at how the cumulative total of Runes has expanded to highlight this issue. As of the writing of this article, the number of Runes has reached 71 million, however, the popularity of the protocol has started to decline significantly since mid-April of this year.
Among various reasons that may have led to the decrease in trading activity related to Runes, we believe that the emergence of the Runes protocol is a significant factor contributing to this situation, claiming to be a more efficient method of introducing other fungible tokens on Bitcoin. The Runes protocol’s launch on the halving block explains why the decline in Runes-related transactions also occurred in mid-April.
The Runes protocol follows a mechanism completely different from Runes and BRC-20 tokens, utilizing an OP_RETURN field with a length of only 80 bytes to achieve its functionality. This feature allows the protocol to encode arbitrary data into the chain, significantly reducing the network space compared to the previous two protocols.
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, a demand that has been maintained at high levels 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 suggests that speculative activities by collectors may have shifted from Bitcoin Runes to the Runes market.
Another significant discrepancy related to ETFs has recently attracted widespread attention in the market. Despite the continuous influx of funds into US spot ETF products, the price has remained stagnant. To determine and evaluate the impact of ETF demand on the market, we can compare the ETF asset size (862,000 BTC) with the Bitcoin asset sizes 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 amounts to approximately 4.23 million BTC, accounting for 27% of the total circulating supply after deducting dormant Bitcoin assets held for over seven years.
Among these, Coinbase holds a significant amount of Bitcoin through its custody services, including a large portion of assets belonging to trading platforms and US spot ETF assets. Currently, Coinbase trading platform and Coinbase custody entity hold around 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 evaluating the number of “whale wallets” (wallets holding assets exceeding 100 BTC) flowing into the Coinbase trading platform, we can see that there has been a significant increase in funds flowing into the platform after the introduction of ETF products.
However, it is important to note that a large portion of Bitcoin assets flowing into trading platforms is strongly correlated with outflows from address clusters associated with GBTC, which has been one of the long-term supply sources in the market supply.
In addition to the selling pressure from GBTC when the market rebounds to new all-time highs, another factor recently contributed to the weakening demand pressure for US spot ETFs. Observing the situation in the Chicago Mercantile Exchange futures market, we note that the total value of open interest contracts has now stabilized at around $8 billion, after reaching a historical high of $11.5 billion in March 2024. This may indicate that more traditional market traders are adopting spot arbitrage strategies.
This arbitrage involves purchasing long spot positions and combining them with selling (shorting) futures contracts of the same underlying asset at a premium, aiming to ultimately profit from the trade.
As a result, entities classified as hedge funds are building increasingly significant net short positions in Bitcoin futures on the Chicago Mercantile Exchange. This suggests that spot arbitrage trading may be a significant source of ETF inflow demand, with these ETF products essentially serving as tools to gain long spot exposure. Since 2023, the total value of open interest contracts on the Chicago Mercantile Exchange has significantly increased, establishing its dominant position in the market. This dominance 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 (with a contract value of 5 BTC) and Micro Bitcoin futures (with a contract value of 0.1 BTC) stand at $6.33 billion and $97 million, respectively.
In summary, the widespread acceptance of the Runes protocol has accelerated the significant divergence between activity indicators, utilizing address reuse patterns to allow a single address to generate multiple transactions. The emergence of spot arbitrage trading between long US spot ETF products and short futures on the Chicago Mercantile Exchange, and its substantial scale, has greatly suppressed the inflow of funds into ETF products by buyers. Although this suppression currently has a relatively neutral impact on market prices, it also indicates that the market currently requires active buyers driven by non-arbitrage demand to further stimulate upward price movements.
