Despite the influx of funds from US spot ETFs bringing vitality to the market, market-neutral cash and carry trading strategies are balancing buying power, leading to a neutral price impact. This article is sourced from an article titled “Dissecting Divergence” by Glassnode, compiled, translated, and written by BlockBeats.
Summary
Divergence in activity
Divergence in ETF demand
Conclusion
In this in-depth analysis, we focus on several key dynamics of the Bitcoin market, from the evolution of technical protocols to macroscopic 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 buying power, leading to a neutral price impact.
Furthermore, the decrease in active addresses on the Bitcoin network contrasts sharply with the surge in trading volume, prompting deep reflection on the reasons behind this. By analyzing the impact of emerging technologies such as the Runes protocol, we reveal its direct effect on the decrease in active addresses. At the same time, we also observe the amount of Bitcoin held by major entities and the significant role of Coinbase in the market, shaping the current market landscape.
While the influx of funds from US ETFs is impressive, market-neutral cash and carry trading seems to be reducing buying pressure, and the market needs non-arbitrage demand to further drive prices higher. 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 formed 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 currently holds a balance of 862,000 BTC.
The structure of cash and carry trading seems to be an important source of ETF inflow demand, with ETFs used as tools to acquire long spot positions, while the net short positions of Bitcoin accumulate in the CME futures market.
On-chain activity indicators, including active addresses, trading volume, and transaction amounts, are key tools for evaluating the development and efficiency of blockchain networks. In mid-2021, China imposed restrictions on Bitcoin mining, leading to a sharp decrease in the number of active addresses on the Bitcoin network from over 1.1 million to just 800,000.
The Bitcoin network is currently facing activity contraction, with reasons behind it fundamentally different from the past. In the following sections, we will delve into emerging concepts such as Runes, ordinal numbers, BRC-20 tokens, and symbols, and how they fundamentally change analysts’ understanding and forecasting of future trends in activity indicators on the chain.
Despite historically strong market momentum being accompanied by growth in active addresses and daily trading volume, the current trend deviates from this.
While the number of active addresses seems to be decreasing, the transaction processing volume on the Bitcoin network is nearing historical 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 share of symbols and BRC-20 tokens, a strong correlation can be observed. Particularly noteworthy is the sharp decrease in the number of symbols since mid-April.
This indicates that the decrease in the number of active addresses is mainly due to a reduction in the use of symbols and ordinal numbers. It should be noted that in this area, many wallets and protocols reuse the same address, and if an address has multiple activities in 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 symbol activity, we can focus on the emergence of the Runes protocol, which claims to introduce a more efficient way of introducing substitute tokens on Bitcoin. The Runes protocol went live during the block halving, explaining the decrease in symbol numbers since mid-April.
Runes adopts a different technical mechanism than symbols and BRC-20 tokens, utilizing 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 rapidly gained market popularity, with daily trading demand ranging from 600,000 to 800,000 transactions, maintaining this high level of transaction volume since then.
Currently, transactions related to Runes account for as much as 57.2% of daily trading volume, significantly surpassing BRC-20 tokens, ordinal numbers, and symbols. This phenomenon indicates that user speculative interest may have shifted from symbols to the emerging Runes market.
A recent issue of particular market concern is that despite the massive influx of funds from US spot ETFs, prices have experienced 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 main tagged entities’ holdings in the market.
US spot ETF holdings are 862,000 BTC, Mt. Gox creditors hold 141,000 BTC, the US government holds 207,000 BTC, all exchanges combined hold 2.3 million BTC, and miners (excluding Patoshi) own 706,000 BTC. The total holdings of these major entities amount to around 4.23 million BTC, accounting for 27% of the adjusted circulating supply of Bitcoin, excluding Bitcoin that has not been active for over seven years.
Coinbase, as a leading cryptocurrency platform, controls significant exchange assets and manages the Bitcoin holdings of the US spot ETF through its custody services. It is estimated that Coinbase Exchange and Coinbase Custody currently hold around 270,000 BTC and 5.69 million BTC, respectively.
With its services for ETF customers and traditional on-chain asset holders, Coinbase’s influence on price formation mechanisms in the market is increasing. Observing the dynamics of large deposits in Coinbase Exchange wallets, there has been a noticeable increase in deposit volume since the ETF launch.
Most of the deposited Bitcoin is closely related to the continuous outflow of addresses associated with GBTC, a key reason for the oversupply of Bitcoin throughout the year.
In addition to the selling pressure brought by GBTC when hitting historical highs in the Bitcoin market, another factor has recently acted as a suppressant 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 maintained above $8 billion. This trend may reflect a growing number of traditional market participants utilizing cash and carry arbitrage strategies.
These arbitrage strategies take a market-neutral stance, involving simultaneously buying long spot positions and selling (shorting) futures contracts of the same asset, the latter being the object of trading due to existing premiums.
Observations show that investors classified as hedge funds are building increasingly large net short positions on Bitcoin.
This suggests that the cash and carry trading structure may be a key driver of ETF fund inflows, using ETFs as a way to acquire long-term spot Bitcoin positions. Since 2023, the CME Group exchange has seen significant growth in open interest contracts and market leadership, revealing itself as the preferred platform for hedge funds to short futures.
Currently, hedge funds hold $6.33 billion in net short positions 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 has significantly exacerbated the differences between activity indicators, as the protocol allows single addresses to generate multiple transactions through address reuse. At the same time, cash and carry arbitrage behaviors between the US spot ETF product and futures short trading through the CME Group exchange effectively counter the inflow of ETF funds. This market phenomenon leads to a neutral impact on prices, implying the need for non-arbitrage natural buyers (i.e., real buyers) to drive prices higher.