Despite the remarkable inflow of US spot ETFs why did BTC not experience a significant surge

Authors: CryptoVizArt, UkuriaOC, Glassnode
Translated by: Deng Tong, Golden Finance
Summary
– The emergence of the Runes protocol has created a counterintuitive discrepancy between the decrease in active addresses and the increase in transaction volume.
– Major token entities hold an impressive approximately 4.23 million BTC, representing 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 acquire long spot exposure, while the net short positions of Bitcoin in the Chicago Mercantile Exchange Group futures market are growing.
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 sharply declined from over about 1.1 million per day to only about 800,000 per day.
The Bitcoin network is currently experiencing a similar contraction in network activity, though 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 perspectives of on-chain analysts on future activity indicators.
Despite the strong market momentum with increasing active addresses and daily transaction volumes, a deviation is occurring in this trend.
While active addresses seem to be decreasing, the transaction volume being processed by the network is approaching historical 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 decrease 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 mainly due to a decrease in the 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 will not be counted multiple times. So, if an address generates ten transactions in a day, it will be shown as one active address, but there were actually ten transactions.
To illustrate how the growth of inscriptions has expanded since early 2023, we can see how the total number of inscriptions has increased. As of the writing of this article, the number of inscriptions has reached 71 million, however, the popularity of the protocol has significantly declined since mid-April of 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 launched on a halving block, explaining the decline in inscriptions in mid-April.
Runes follows a mechanism different from 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 on the halving day (April 20, 2024), the demand for Runes transactions surged to between 600,000 and 800,000 per day, remaining high since then.
Rune-related transactions have now largely replaced BRC-20 tokens, as well as Ordinals and inscriptions, occupying 57.2% of daily transactions. This indicates that speculative behavior among collectors may have shifted from inscriptions to the Rune market.
ETF Demand Shows Divergence
Another recent discrepancy that has attracted attention is that despite the remarkable inflow into the US spot ETF, the price has remained stagnant, consolidating sideways. To identify and evaluate the demand side of the ETF, we can compare the balance of the ETF (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 estimated total balance of all these entities is approximately 4.23 million, accounting for over 27% of the overall adjusted circulating supply (i.e., the total supply minus tokens idle for over seven years).
Coinbase, as an entity, holds a large total exchange balance through its custody service, as well as the US spot ETF balance. Coinbase Exchange and Coinbase Custody entities currently hold about 270,000 and 569,000 BTC, respectively.
As Coinbase serves both ETF customers and traditional on-chain asset holders, the importance of the exchange in the market pricing process has become significant. By evaluating the number of whales depositing into Coinbase Exchange wallets, we can see a substantial increase in deposit transaction volume after the ETF was launched.
However, we note that a significant portion of deposits is related to outflows from the GBTC address cluster, which has been a persistent supply expense throughout the year.
Aside from the selling pressure on GBTC during market rebounds to new highs, there has recently been another factor leading to a weakening of demand pressure for the US spot ETF.
Looking at the Chicago Mercantile Exchange Group futures market, open interest contracts have stabilized at over $8 billion, having hit a historical 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 market-neutral positions, combining the purchase of long spot positions with the sale (shorting) of futures contracts of the same asset at a premium.
We can see that entities classified as hedge funds are building increasingly large net short positions in Bitcoin.
This indicates that spot arbitrage trading structures may be an important source of ETF inflow demand, with ETFs being tools to acquire long spot exposure. Since 2023, open interest contracts and overall market dominance in the Chicago Mercantile Exchange Group (CME Group) have significantly increased, suggesting 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 and Micro Chicago Mercantile Exchange Bitcoin markets are $6.33 billion and $97 million, respectively.
In Conclusion
The extreme popularity of the Runes protocol has accelerated a significant discrepancy between activity indicators, utilizing a large amount of address reuse where a single address generates multiple transactions.
The emergence and scale of spot arbitrage trading between going long US spot ETF products and shorting futures on the Chicago Mercantile Exchange have largely suppressed the inflow of funds into the ETF from the buy side. This has had a relatively neutral impact on market prices, indicating the need for organic buyers driven by non-arbitrage demand to further stimulate positive price action.