Bitcoin Network Activity Divergence

The Bitcoin (BTC) network is experiencing a notable divergence in its activity metrics, according to Glassnode Insights. While active addresses are on a decline, transaction counts have surged to near all-time-highs. This trend, which deviates from the historical correlation between active addresses and transaction volumes, is largely driven by the advent of new protocols such as Inscriptions, Ordinals, BRC-20s, and more recently, Runes.

Historically, China’s restrictions on Bitcoin mining in mid-2021 led to a sharp drop in active addresses from over 1.1 million to around 800,000 per day. Currently, Bitcoin is witnessing a similar contraction, albeit due to different catalysts. The Runes protocol, which launched around the halving block in April 2024, has significantly influenced the network’s activity metrics, by utilizing the OP_RETURN field to encode data more efficiently, demanding much less blockspace compared to its predecessors.

Impact of the Runes Protocol

The Runes protocol has shifted market dynamics, with Runes-related transactions now accounting for a substantial 57.2% of daily transactions. This shift has displaced the popularity of BRC-20 tokens, Ordinals, and Inscriptions, which had previously driven transaction counts. Since mid-April, when Runes went live, there has been a marked decline in inscription counts, correlating with the reduction in active address activity.

This phenomenon is partially due to address reuse in wallets and protocols, where a single address can generate multiple transactions. Despite the drop in active addresses, the network’s demand for blockspace remains high, as evidenced by the current monthly average transaction count of 617,000 per day, which is 31% above the yearly average.

ETF Inflows and Market Neutrality

In another divergence, Bitcoin’s price has remained relatively stagnant despite significant inflows into US Spot ETFs, which now hold 862,000 BTC. The aggregated balance of major labeled entities, including these ETFs, is approximately 4.23 million BTC, or 27% of the adjusted circulating supply.

Coinbase plays a critical role here, holding a large fraction of both aggregate exchange balances and ETF balances through its custody services. The exchange and its custody services collectively hold around 839,000 BTC. This substantial holding underscores Coinbase’s influence in the market pricing process.

Interestingly, the stagnant price movement can be attributed to the Cash-and-Carry trade, a market-neutral strategy where traders go long on spot positions via ETFs and short on futures contracts. This strategy has seen a rise in popularity, particularly on the CME Group futures market, where open interest has stabilized above $8 billion following a record high of $11.5 billion in March 2024.

Hedge Funds and Short Positions

Hedge funds, in particular, have been building significant net short positions in both CME Bitcoin and Micro CME Bitcoin markets, amounting to $6.33 billion and $97 million, respectively. This trend suggests that hedge funds are using CME futures to hedge against their long spot positions obtained through ETFs.

Such market-neutral strategies have effectively neutralized the buy-side pressure from ETF inflows, resulting in a relatively flat impact on Bitcoin’s market price. For the price to see an upward movement, organic buy-side demand from non-arbitrage participants is necessary to stimulate positive price action.

Conclusion

The current divergence in Bitcoin network activity metrics and ETF demand highlights the evolving dynamics within the cryptocurrency market. The Runes protocol has significantly impacted transaction counts and reduced active address activity, while the Cash-and-Carry trade strategy has tempered the bullish impact of ETF inflows. Moving forward, the market will likely require organic buy-side demand to drive significant price movements.

Disclaimer: This article does not provide any investment advice. All data is provided for informational and educational purposes only. No investment decision should be based on the information provided here and readers are solely responsible for their own investment decisions.

Exchange balances are derived from Glassnode’s extensive database of address labels, gathered through published exchange information and proprietary clustering algorithms. While efforts are made to ensure accuracy, these figures may not reflect an exchange’s full reserves. Users should exercise caution and discretion when using these metrics. Glassnode is not liable for any discrepancies or inaccuracies.

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