Despite the influx of funds from US spot ETFs bringing vitality to the market, the market-neutral cash and carry trading strategies are balancing the buying force, leading to a more neutral price impact. This article is sourced from the Glassnode article “Dissecting Divergence,” compiled, translated, and written by BlockBeats.
In this in-depth analysis, we focus on several key dynamics in the Bitcoin market, from the evolution of technical protocols to macro-view changes in market structure. Of particular note is that while the influx of funds from US spot ETFs has brought vitality to the market, market-neutral cash and carry trading strategies are balancing the buying force, leading to a more neutral price impact.
Additionally, the decrease in active addresses on the Bitcoin network contrasts sharply with the surge in trading volume, prompting deeper consideration of the underlying reasons. Through an analysis of the impact of emerging technologies like the Runes protocol, we reveal its direct effect on the decrease in active addresses. Simultaneously, we also observe the significant amount of Bitcoin held by major entities and the important role of Coinbase in the market, shaping the current market landscape.
While the impressive influx of funds into US ETFs is notable, the market-neutral basis trading seems to be alleviating the buying force, and the market needs non-arbitrage demand to further drive price increases. At the same time, we also analyze the significant differences between the decrease in active addresses and the surge in trading volume.
With the emergence of the Runes protocol, an unexpected divergence has emerged between the decrease in active addresses and the increase in trading volume.
Currently, major tagged entities hold a staggering 4.23 million BTC, accounting for over 27% of the adjusted supply, while the US spot ETF now holds a balance of 862,000 BTC.
The basis trading structure appears to be a significant source of ETF inflow demand, with ETFs used as a tool to obtain long spot positions, while the net short positions of Bitcoin in the futures market on the CME exchange continue to accumulate.
On-chain activity indicators, including active addresses, trading volume, and transaction amounts, are crucial tools for evaluating blockchain network development and performance. In mid-2021, China imposed restrictions on Bitcoin mining, leading to a sharp decrease in active addresses on the Bitcoin network from over 1.1 million to only 800,000.
The Bitcoin network is currently facing activity contraction, with a different motive behind it than in the past. In the following sections, we will delve into emerging concepts such as Runes, ordinal numbers, BRC-20 tokens, and runes, and how they fundamentally transform analysts’ understanding and predictions of future trends in activity indicators.
Despite historically strong market momentum being accompanied by an increase in active addresses and daily trading volume, the current trend deviates from this pattern.
While the number of active addresses appears to be decreasing, the transaction processing volume on the Bitcoin network is nearing historic highs. The current average monthly transaction volume reaches 617,000 transactions per day, 31% higher than the annual average level, indicating relatively high demand for Bitcoin block space.
By comparing the recent decrease in active addresses with the trading shares of runes and BRC-20 tokens, we observe a strong correlation. Particularly noteworthy is the sharp decline in the number of ordinal numbers since mid-April.
This indicates that the decrease in active addresses is mainly due to the reduced usage of ordinal numbers and runes. It should be noted that in this area, many wallets and protocols reuse the same address, and if an address has multiple activities within a day, it will not be counted multiple times. Therefore, even if an address generates ten transactions in a day, it is still counted as a single active address in the statistics.
To explain the decrease in ordinal activity, we can focus on the emergence of the runes protocol, which claims to introduce a more efficient way of introducing alternative tokens on Bitcoin. The runes protocol went live during the block halving, explaining the decrease in the number of ordinals since mid-April.
The runes protocol utilizes a different technical mechanism from ordinals and BRC-20 tokens, using the OP_RETURN field (80 bytes) to encode arbitrary data on the blockchain, significantly reducing the demand for block space while maintaining data integrity.
Since its launch on April 20, 2024, the runes protocol has quickly gained market popularity, with daily trading demand increasing to between 600,000 and 800,000 transactions, maintaining this high level of transaction volume ever since.
Currently, transactions related to runes account for as much as 57.2% of the daily transaction volume, significantly surpassing BRC-20 tokens, ordinal numbers, and runes. This phenomenon indicates that user speculative interest may have shifted from ordinals to the emerging runes market.
A recent market concern is that despite the massive influx of funds into US spot ETFs, prices have shown stagnant sideways fluctuations. To further analyze and evaluate the demand side of ETFs, we can compare the current holdings of ETFs (862,000 BTC) with the major tagged entities’ holdings in the market.
US spot ETF holdings are 862,000 BTC, while Mt. Gox creditors hold 141,000 BTC, the US government holds 207,000 BTC, all exchanges collectively hold 2.3 million BTC, and miners (excluding Patoshi) hold 706,000 BTC. The total holdings of these major entities amount to approximately 4.23 million BTC, constituting over 27% of the adjusted circulating supply of Bitcoin, where the adjusted supply is calculated by deducting Bitcoin that has remained inactive for over seven years from the total supply.
Coinbase, as a leading cryptocurrency platform, controls significant exchange assets, while its custodial services manage the Bitcoin holdings of the US spot ETF. It is estimated that Coinbase Exchange and Coinbase Custody currently hold approximately 270,000 BTC and 5.69 million BTC, respectively.
Due to its services to ETF clients and traditional on-chain asset holders, Coinbase’s influence on market price formation mechanisms is increasing. Observing the dynamics of large deposits into Coinbase Exchange wallets, there has been a noticeable increase in deposit volumes since the ETF was launched.
Most of the deposited Bitcoins are closely related to the continuous outflows from GBTC addresses, which has become a key reason for the year-round oversupply of Bitcoin.
In addition to the selling pressure brought by GBTC during historical highs in the Bitcoin market, another factor has recently had a dampening effect on the demand for US spot ETFs.
Looking at the CME Group futures market, open interest contracts reached a record high of $11.5 billion in March 2024 and have since been maintained at over $8 billion. This trend may reflect the increasing use of cash and carry arbitrage strategies by traditional market participants.
These arbitrage strategies take a market-neutral position, involving the simultaneous purchase of long spot positions and selling (shorting) the same asset’s futures contracts, which become the subject of trade due to existing premiums.
Observations show that investors classified as hedge funds are building increasingly large net short positions for Bitcoin.
This indicates that the basis trading structure may be a key driver of the influx of funds into ETFs, using ETFs as a means to acquire long-term Bitcoin spot positions. Since 2023, the CME Group exchange has seen significant growth in open interest contracts and market leadership positions, revealing its status as a preferred platform for hedge funds to short futures.
Currently, hedge funds hold net short positions of $6.33 billion in the Bitcoin futures market at CME, with net short positions in the Micro CME Bitcoin futures market at $97 million.
The popularity of the runes protocol significantly exacerbates the differences between activity indicators, allowing a single address to generate multiple transactions through the reuse of addresses. Additionally, the cash and carry arbitrage behavior between US spot ETF products and futures short trading through the CME Group exchange effectively offsets the influx of ETF funds. This market phenomenon leads to a more neutral impact on prices, implying the market needs non-arbitrage natural buyers (i.e., real buyers) to drive price increases.