Why is the inflow of US spot ETFs astonishing but hasn't driven a significant rise in BTC?

Original Title: 《 Dissecting Divergences》

Authors: CryptoVizArt, UkuriaOC, Glassnode

Compiler: Deng Tong, Jinse Finance

Summary

With the emergence of the Runes protocol, an intuitive divergence has formed between the decrease in active addresses and the increase in transaction volume.

Major marked entities currently hold an astonishing approximately 4.23 million BTC, accounting for over 27% of the adjusted supply, while the U.S. spot ETF now holds a balance of 862,000 BTC.

The structure of spot and futures trading appears to be an important source of demand for ETF inflows, with ETFs being used as a tool to gain long spot exposure, while net short positions in Bitcoin on the Chicago Mercantile Exchange's futures market continue to grow.

Decrease in Active Addresses vs. Increase in Network Transaction Volume

On-chain activity metrics such as active addresses, transactions, and transaction volume provide valuable tools for analyzing the growth and performance of blockchain networks. When restrictions on Bitcoin mining were implemented in mid-2021, the number of active addresses on the Bitcoin network plummeted from over approximately 1.1 million per day to just about 800,000 per day.

The Bitcoin network is currently experiencing a similar contraction in network activity, although 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 on-chain analysts' views on future activity metrics.

Despite strong market momentum, the number of active addresses and daily transaction volume are diverging.

While active addresses appear to be decreasing, the transaction volume processed by the network is nearing historical highs. The current average monthly transaction volume is 617k/day, which is 31% higher than the annual average, indicating relatively high demand for Bitcoin block space.

If we compare the recent decline in active addresses with the trading share of inscriptions and BRC-20 tokens, we can observe a strong correlation. Notably, since mid-April, the number of inscriptions has also sharply declined.

This indicates that the initial driving factor behind the decrease in address activity is primarily due to the reduced usage of inscriptions and Ordinals. It is worth noting that many wallets and protocols within the industry reuse addresses; if an address is active more than once in a day, it is not counted multiple times. Therefore, if an address generates ten transactions in a day, it will show as one active address, but there are actually ten transactions.

To illustrate how inscriptions have grown since the beginning of 2023, we can see how the cumulative total of inscriptions has expanded. As of the writing of this article, the number of inscriptions has reached 71 million; however, since mid-April of this year, the popularity of the protocol has significantly declined.

To explain the decline in inscription activity, we must highlight the emergence of the Runes protocol, which claims to be a more efficient way to introduce fungible tokens on Bitcoin. Runes launched at the halving block, which explains the decline in inscriptions in mid-April.

Runes follow a different mechanism than inscriptions and BRC-20 tokens, utilizing the OP_RETURN field (80 bytes). This allows the protocol to encode arbitrary data onto the chain while requiring less block space.

With the launch of the Runes protocol at the halving (April 20, 2024), demand for Runes transactions surged to between 600,000 and 800,000 per day, remaining high ever since.

Rune-related transactions have now largely replaced BRC-20 tokens as well as Ordinals and inscriptions, accounting for 57.2% of daily transactions. This indicates that speculative behavior among collectors may have shifted from inscriptions to the Runes market.

Divergence in ETF Demand

Another recent divergence that has drawn attention is that despite the astonishing inflows into U.S. spot ETFs, prices have stagnated and consolidated. To identify and assess the demand side of ETFs, we can compare the ETF balance (862k BTC) with other major entities.

U.S. Spot ETF = 862k BTC

Mt. Gox Trustee = 141k BTC

U.S. Government = 207k BTC

All Exchanges = 2.3 million BTC

Miners (excluding Patoshi) = 706k BTC

The total balance of all these entities is estimated to be around 4.23 million, accounting for 27% of the overall adjusted circulating supply (i.e., total supply minus tokens that have been idle for over seven years).

Coinbase, as an entity, holds a significant total exchange balance as well as the U.S. spot ETF balance through its custody services. Coinbase exchange and Coinbase custody entities currently hold approximately 270,000 and 569,000 BTC, respectively.

As Coinbase serves both ETF clients and traditional on-chain asset holders, the exchange's importance in the market pricing process has become very significant. By assessing the number of whales depositing into Coinbase exchange wallets, we can see a substantial increase in deposit transaction volume following the ETF launch.

However, we note that a significant portion of the deposits is related to outflows from GBTC address clusters, which have been a long-standing supply drain throughout the year.

In addition to the selling pressure from GBTC when the market rebounded to new highs, a recent factor has contributed to the weakening demand pressure for U.S. spot ETFs.

Across the Chicago Mercantile Exchange futures market, open interest has stabilized above $8 billion, having previously reached a historic high of $11.5 billion in March 2024. This may indicate that an increasing number of 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 on the same underlying asset that trade at a premium.

We can see that entities classified as hedge funds are building increasingly larger net short positions in Bitcoin.

This indicates that the structure of spot arbitrage trading may be an important source of demand for ETF inflows, where ETFs serve as a tool to gain long spot exposure. Since 2023, open interest and overall market dominance on the Chicago Mercantile Exchange (CME Group) have also significantly increased, indicating it is becoming the preferred venue for hedge funds to short futures through CME.

Currently, hedge funds have net short positions of $6.33 billion and $97 million in the CME Bitcoin and Micro CME Bitcoin markets, respectively.

Conclusion

The extreme popularity of the Runes protocol has accelerated the significant discrepancies between activity metrics, as the protocol leverages a large amount of address reuse, with a single address generating multiple transactions.

The emergence and scale of spot arbitrage trading between going long on U.S. spot ETF products and shorting futures through the CME has largely suppressed the inflow of funds from buyers into the ETF. This has had a relatively neutral impact on market prices, indicating a need for organic buying driven by non-arbitrage demand to further stimulate positive price action.