Author: Checkmate, Glassnode; Compiler: Songxue, Golden Finance
2023 has been an incredible year for digital assets, with Bitcoin up over 172% and a correction of less than 20% , net capital inflows into BTC, ETH and stablecoins.
The market has broken through several important technologies and on-chain pricing models this year, and October is a major pivot point for institutional capital flows.
Currently, the supply of Bitcoin held by long-term holders is almost at an all-time high, and the vast majority of Bitcoins are now profitable.
Market structures are undergoing major changes, such as Tether re-establishing stablecoin dominance, CME futures disrupting Binance, and the significant growth of the options market.
In this final issue of the year, we will take a quick look at the changes that have occurred on the chain this year. We explore how the Bitcoin, Ethereum, derivatives, and stablecoin landscape evolves in 2023, and how this sets the stage for an exciting future.
2023 has been an extraordinary year for digital assets, with Bitcoin’s market capitalization increasing by a peak of 172%. The rest of the digital asset ecosystem also had a strong year, with Ethereum and the broader altcoin space growing by more than 90% in market capitalization.
This highlights Bitcoin’s rising dominance, which is often seen as a time when the market is recovering from a prolonged bear market, such as 2021-22. Ethereum, in particular, has had a somewhat slow start, with the ETH/BTC ratio falling to multi-year lows around 0.052, despite the successful launch of the Shanghai update and the development of the L2 ecosystem.
While digital assets have significantly outperformed traditional assets such as stocks, bonds and precious metals throughout the year, the rebound since late October accounted for most of the gains. First it broke the psychologically important price level of $30,000, as well as a number of important pricing levels.
One of the striking features of the 2023 market is the very shallow depth of all price pullbacks and corrections. Historically, BTC's bear market recoveries and bull market uptrends have typically seen retracements of at least -25% from local highs, with many examples exceeding -50%.
However, the deepest pullback in 2023 closed just off the local high A low -20% suggests buyer support and the overall supply-demand balance has been favorable throughout the year.
Ethereum has also seen relatively shallow adjustments, with the deepest adjustment reaching -40% in early January. Despite the weaker performance relative to BTC, this also paints a constructive backdrop in which supply reductions due to consolidation are meeting relatively resilient demand flows.
The 2022 bear market will be slightly less brutal than the 2018-20 bear market cycle, with most major digital assets starting in 2023 down -75% from ATH. Strong performance since the lows has recouped much of the losses. The major asset currently lags its ATH by -40% (BTC), -55% (ETH), -51% (altcoins, excluding ETH and stablecoins), and stablecoin supply (-24%).
From the perspective of the chain It appears that the realized caps for BTC and ETH provide an excellent tool to track the recovery of capital flows for the respective assets. Total realized cap drops during the 2022 bear market reached similar levels to previous cycles, reflecting net capital outflows of -18% for BTC and -30% for ETH.
Capital inflows have been much slower to recover, however, with Bitcoin achieving a cap of over 100% ATerH 715 days ago. By comparison, in the previous cycle, it took approximately 550 days to achieve full recovery of the cap.
This year, the Bitcoin market has overcome numerous technical and on-chain pricing models, all of which help us understand how strong its performance has been.
This year began with a short squeeze in January that pushed the market above realized prices (red) that have effectively capped prices since June 2022. This advance also broke above the 200D-SMA (blue) until it encountered resistance at the 200W-SMA (red) in March.
Until August, Bitcoin price continued to consolidate between the 200D-SMA (blue) and the real market average price (green), entering one of the least volatile periods in Bitcoin history (see WoC- 32 and WoC-33). Soon after, a rapid deleveraging event took the price from $29,000 to $26,000 in a single day and below the two long-term technical price averages mentioned above.
October’s rally was a real game-changer, with all remaining price models recovering and breaking above the key psychological level of $30,000. Bitcoin has since reached a yearly high of $44,500 and is consolidating around $42,000 at the time of writing.
Readers in this article A common theme that may be noticed is how capital flows, market momentum and performance have accelerated since the end of October. In WoC-49, we explore how this relates to BTC price breaking through the $30,000 level, which we describe as a transition from an "uncertain recovery" phase to an "enthusiastic uptrend."
Notably, the October rally broke two important levels that had charted this shift in previous cycles:
Technical Market Midpoints: Broad price levels that serve as support in the early stages of a bear market and resistance in the later stages of a bear market. . In this cycle, $30,000 was the last major support area before a series of capitulatory sell-offs that ultimately led to FTX’s collapse.
Cointime real market average price: Reflects the cost basis of active investors. This model was developed in our Cointime Economics research in partnership with ARK Invest.
We can also see a significant change in the characteristics of the recovery from Bitcoin’s bear signals, as all eight indicators have entered positive territory since October. Readings have been mixed throughout much of 2023, showing very similar characteristics to the 2019-20 period.
With all eight indicators now live, this indicates multiple indicators of the Bitcoin market structure and In the area, the market has entered positive territory typically associated with resilient uptrends.
We can see that Bitcoin transaction volume was relatively stagnant before October, supporting the idea of a market phase shift. The October rally pushed Bitcoin’s trading volume to double from $2.4 billion per day to more than $5 billion per day, the highest level since June 2022.
We can also watch ToExchange inflows and outflows for BTC and ETH increased throughout the year, indicating a general expansion of spot trading interest. Notably, BTC trading volume is growing significantly faster than ETH trading volume, consistent with observations of Bitcoin’s rising dominance. It’s common for Bitcoin to lead investor confidence out of a downturn after a prolonged bear market, and this chart helps visualize this phenomenon.
This year, Bitcoin The number of transactions reached an all-time high, mainly due to unexpected growth in Ordinals and Inscriptions. These transactions embed data such as text files and images into the signature portion of the transaction.
Thus, we can now evaluate two types of Bitcoin transactions:
Total transaction count (unfiltered) (orange)
Currency transaction volume has reached a multi-year high, almost reaching an all-time high of 372.5k/day . (Blue)
Inscription trading adds an additional 175,000 to 356,000 transactions per day to classic currency trading. (red)
The vast majority of inscriptions tend to be text-based and related to a novel token standard called BRC-20 (Blue). At its peak, the Bitcoin network had more than 300,000 inscriptions per day, far exceeding the peak of 172,000 per day for image-based inscriptions in April? (red) (images are larger, so inscriptions cost more as fees increase ).
Due to the Bitcoin Zone With this new buyer of block space, miners’ fee income has increased significantly, with several blocks in 2023 even paying more than the 6.25 BTC subsidy. There have been two major fee hikes this year, and fees now account for about a quarter of miners’ revenue. This is comparable to the euphoric phases of the 2017 and 2021 bull markets.
Interestingly, While inscriptions account for approximately 50% of confirmed transactions, surprisingly they only occupy around 10% to 15% of the block space. This is a result of the smaller text files and the nuances related to SegWit data discounting (a topic we cover in WoC-39).
This year, Inscription Contribution It accounts for 15% to 30% of the total transaction fee income of miners. This highlights the unintuitive nature of SegWit discounts, where Inscription transactions consume a small portion of the block space (in bytes), paying a significant proportion of fees, but also account for around half of all confirmed transactions.
In effect, Inscriptions and SegWit data discounts allow miners to put more transactions into the same maximum size block and thus pay more. If demand for Inscriptions persists, the impact on miners’ income could meaningfully improve miners’ economics, especially with the fourth halving on the horizon.
For Ethereum, on-chain activity has been a bit sluggish this year, with October once again becoming a significant inflection point.
Active addresses are relatively stable, about 390,000/day;
Transaction volume recently increased from 970,000 transactions/day to 1.11 million transactions/day;
ETH transaction volume increased from US$1.8 billion/day increased to US$2.9 billion/day.
While ETH’s overall market price performance lags behind that of the broader digital asset space, its ecosystem continues to expand, mature, and develop. In particular,the total value locked in the expanding Layer-2 blockchain increased by 60%, with over $12 billion now Locked in the bridge.
These L2 chains are looking to expand and expand the Ethereum block space, At the same time, its data and finality are anchored to the Ethereum main chain to maintain its security.
Another key growth area for Ethereum is the total amount of ETH staked through the new proof-of-stake consensus mechanism. Since the beginning of this year, the number of pledged ETH has increased by 119%, and the number of ETH currently locked in the pledge agreement has exceeded 34.638 million. The Shanghai upgrade was also successfully launched in April, allowing stakers to complete withdrawals and reshuffle staking providers and settings for the first time since the launch of the Beacon chain in December 2020.
Despite Bitcoin’s incredible price performance, a large portion of Bitcoin remains dormant and reaches long-term holder status in investor wallets. Of the total circulating supply of 19.574 million BTC, over 14.9 million (76.1%) are held off exchanges and have not moved in over 155 days, adding 825,000 BTC year-to-date. This also brings the short-term holder supply to an all-time low of 2.317 million BTC.
As the market rebounds , the vast majority of investors’ tokens have returned to “profitability,” whether due to changing hands or rising in price above cost. The chart below shows how the total number of “losing” tokens has dropped to around 1.9 million BTC, most of which is held by long-term holders who bought near the 2021 highs.
On the other hand, , “profitable” supply now accounts for over 90% of circulating supply, with the October rebound putting it above historical averages. With over 50% of supply underwater at the start of 2023, this is one of the fastest recoveries in history (second only to the 2019 rebound).
The picture below intuitively Shown is the profit supply percentage change for each calendar year since 2015. While not perfect by year, the classic four-year Bitcoin cycle allows us to spot some interesting patterns:
The bear market/recovery phase sees the greatest increase in profit supply as the token capitulates near its lows and returns to profitable territory. (orange)
Early bull market, the general upward trend has made most coins profitable and rebounded to new highs. (Blue)
Euphoric late bull run, the market is at ATH levels, resulting in small positive to negative readings as all coins have made profits and the market is close to drying up. (Green)
Major bear market after the market peaks, with a large number of tokens falling into losses. (red)
Although simple in structure, the framework does highlight the similarities between progress made to date in 2015-16, 2019-20 and 2023 .
Finally about investors The topic of profitability, 2023 will transform long-term holders, short-term holders and ordinary holders from unprofitable to moderately profitable. The NUPL metric for each cohort has not yet reached exciting highs, but is also significantly above the respective cohort's break-even levels.
A striking feature of the 2020-23 cycle is that futures and options markets have become the focus of price exposure and The go-to place for liquidity. 2023 is proving to be an important year in this maturation process, as the future of options markets The size of liquidation contracts has grown to be comparable to or even exceed that of the futures market.
Both companies currently have undelivered contracts between $16 billion and $20 billion, with Deribit continuing to dominate (over 90%) the options market . This hints at growing institutional interest in Bitcoin, as traders and positions take advantage of the options market to deploy more sophisticated trading, risk management, and hedging strategies.
In the futures market , there has also been a noteworthy shift in dominance,Open interest held by regulated CME exchanges For the first time in history, the contract has surpassed offshore exchange Binance. October once again appears to be an important moment for this phase of transition, suggesting an influx of institutional capital.
The futures trading volume of both BTC and ETH increased in October, with the total daily trading volume reaching US$52 billion per day. Bitcoin contracts account for around 67% of trading volume, while Ethereum contracts account for 33%.
In the futures market Cash and arbitrage yields went through three distinct phases over the course of the year, which also tells the story of capital inflows into the space:
From January to August, the yield fluctuated around 5%. This is largely in line with short-term Treasury yields, making it relatively unattractive given the additional risk and complexity of the trade.
From August to October, after a sell-off to $26,000, yields were below 3% and the volatility environment was surprisingly low.
Since October, the yield has exceeded 8%. With futures basis currently holding at 300 basis points above U.S. Treasuries, market maker capital is now motivated to return to the digital asset space.
A relatively new phenomenon of the last cycle is the outsized role that stablecoins play in market structure, becoming the preferred quote currency for traders and the main source of market liquidity .
The total stablecoin supply has been declining since March 2022, down 26% from its peak , becoming the main resistance to market liquidity. This is due to a combination of regulatory pressure (the SEC charged BUSD with being a security), capital rotation (preferring U.S. Treasuries over interest-free stablecoins), and waning investor interest in a bear market.
However,October was a critical point, with the total stablecoin supply bottoming out at $120 billion and supply starting to Growth rate of up to 3% per month. This is the first expansion of the stablecoin supply since March 2022 and may also be a sign of returning investor interest.
The relative dominance of various stablecoins has also changed significantly between 2022 and 2023. The dominance of previously rising stablecoins such as USDC and BUSD has shrunk significantly, with BUSD entering redemption-only mode, while USDC’s dominance has dropped from 37.8% to 19.6% since June 2022.
Tether (USDT) is once again the largest stablecoin, with total supply climbing to over $90.6 billion, accounting for 72.7% of the market.
Finally, we can Compare the 30-day change in realized caps for BTC and ETH with the change in the total stablecoin supply. These three indicators help visualize and measure relative capital flows and rotations between sectors.
October became a critical moment again, with capital inflows for the three major assets turning positive, coinciding with the market breaking through the critical level of $30,000, institutional interest in the derivatives market expanding, and the three major digital assets net capital inflows remain consistent.
2023 is a very different year than 2022, with devastating deleveraging and market declines. On the contrary, this year saw a renewed interest in digital assets, which performed well and saw the emergence of new on-chain works in the form of Bitcoin Inscriptions.
The Bitcoin supply is currently held by long-term holders, with most investors now holding profitable Bitcoins. With the launch of a US ETF looking increasingly likely in early 2024, and the Bitcoin halving due in April, the stage is set for an exciting year ahead.
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