Glassnode: 2023 Annual On-Chain Data Review

Original Title: “2023 Yearly On-chain Review”

Author: Checkmate, Glassnode

Compiled by: Elvin, ChainCatcher

Summary

1. The year 2023 has been an incredible year for digital assets, with Bitcoin rising over 172%, and the maximum drawdown being less than 20%, with net capital inflows into BTC, ETH, and stablecoins.

2. This year, the market has broken through several important technical nodes and on-chain pricing models, with October being a major pivot point for institutional capital flows.

3. Currently, the supply of Bitcoin held by long-term holders has nearly reached an all-time high, and the vast majority of Bitcoin is now in profit.

4. The market structure is undergoing significant changes, such as Tether re-establishing the dominance of stablecoins, CME futures disrupting Binance, and significant growth in the options market.

In this final issue of the year, we will take a whirlwind tour of the changes that have occurred on-chain this year. We will explore how the landscape of Bitcoin, Ethereum, derivatives, and stablecoins has evolved in 2023 and how this lays the foundation for an exciting future.

2023 has been an extraordinary year for digital assets, with Bitcoin's market cap growing by 172% at its peak. Other parts of the digital asset ecosystem also experienced a strong year, with Ethereum and the broader altcoin space seeing market cap growth of over 90%.

This highlights the rising dominance of Bitcoin, which is often seen as a period of market recovery from a prolonged bear market (e.g., 2021-22). Particularly for Ethereum, despite the successful launch of the Shanghai upgrade and the development of the L2 ecosystem, it has had a relatively slow start, with the ETH/BTC ratio dropping to around 0.052, a multi-year low.

Despite the overall performance of digital assets being significantly better than traditional assets like stocks, bonds, and precious metals throughout the year, the rebound since the end of October has accounted for most of the gains. It first broke through the important psychological price level of $30,000, along with many other significant price levels.

Shallow Drawdowns

One of the notable features of the 2023 market is that the depth of all price pullbacks and adjustments has been very shallow. Historically, during BTC's bear market recoveries and bull market uptrends, there would typically be pullbacks of at least -25% from local highs, with many examples exceeding -50%.

However, the deepest pullback in 2023 saw closing prices only -20% lower than local highs, indicating strong buyer support, and the overall supply-demand balance has remained favorable throughout the year.

Ethereum's pullbacks have also been relatively shallow, with the deepest adjustment reaching -40% in early January. Although it has performed more weakly relative to BTC, this also paints a constructive backdrop, indicating that the supply reduction caused by the merge is meeting relatively resilient demand.

The severity of the 2022 bear market was slightly less than that of the 2018-20 bear market cycle, with most major digital assets starting 2023 down -75% from their ATH (all-time high). The strong performance since the lows has recouped most of the losses. Major assets are currently trailing their ATH by -40% (BTC), -55% (ETH), -51% (altcoins, excluding ETH and stablecoins), and stablecoin supply (-24%).

From an on-chain perspective, the realized market cap of BTC and ETH provides an excellent tool for tracking the recovery of capital flows for each asset. The total realized market cap decline during the 2022 bear market reached levels similar to previous cycles, reflecting a net capital outflow of -18% for BTC and -30% for ETH.

However, the recovery speed of capital inflows has been much slower, with Bitcoin's realized market cap ATerH exceeding 100% 715 days ago. In contrast, the complete recovery of the realized cap in previous cycles took about 550 days.

From an on-chain perspective, the realized cap of BTC and ETH provides an excellent tool for tracking the recovery of capital flows for each asset. The total realized cap decline during the 2022 bear market reached levels similar to previous cycles, reflecting a net capital outflow of -18% for BTC and -30% for ETH. However, the recovery speed of capital inflows has been much slower, with Bitcoin's realized cap ATerH exceeding 100% 715 days ago. In contrast, the complete recovery of the realized cap in previous cycles took about 550 days.

Breaking Through the $30,000 Resistance

This year, the Bitcoin market has broken through numerous technical nodes and on-chain pricing models, all of which help us understand how strong its performance has been.

The year began with a short squeeze in January, pushing the market above the Realized Price, which had effectively capped prices since June 2022. This rally also broke through the 200D-SMA, until it encountered resistance at the 200W-SMA in March.

Until August, Bitcoin's price continued to consolidate between the 200D-SMA and the Real Market Average Price, entering one of the least volatile periods in Bitcoin's history (see WoC-32 and WoC-33). Shortly thereafter, a rapid deleveraging event caused prices to drop from $29,000 to $26,000 in a single day, falling below both of the aforementioned long-term technical price averages.

The rebound in October truly changed the game, restoring all remaining price models and breaking through the critical psychological level of $30,000. Since then, Bitcoin has reached an annual high of $44,500 and is currently consolidating around $42,000 as of this writing.

One common theme that readers may notice in this article is how capital flows, market dynamics, and performance have accelerated since the end of October. In WoC-49, we explored the relationship between this and BTC's price breaking through the $30,000 level, which we described as a transition from an "uncertain recovery" phase to an "enthusiastic uptrend."

Notably, the October rebound broke through two important levels that depicted this transition in previous cycles:

1. Technical Market Midpoint: A broad price level that served as support in the early bear market and resistance in the later bear market. In this cycle, $30,000 was the last major support area before a series of capitulative sell-offs that ultimately led to the FTX collapse.

2. Cointime Real Market Average Price: Reflecting the cost basis of active investors. This model was developed in collaboration with ARK Invest in the Cointime Economics study.

We can also see that the characteristics of recovery from Bitcoin bear market signals have changed significantly, as all eight indicators have entered positive territory since October. For most of 2023, the readings have been mixed, exhibiting characteristics very similar to those during the 2019-20 period.

With all eight indicators now activated, this suggests that the market has entered a positive area typically associated with resilient uptrends across multiple indicators and domains of Bitcoin's market structure.

Increase in Volume, Fees, and Inscriptions

We can see that prior to this, Bitcoin's trading volume was relatively stagnant, supporting the view that "October was somewhat of a market phase transition." The rise in October prompted Bitcoin's transfer volume to double, increasing from $2.4B per day to over $5.0B per day, the highest level since June 2022.

We can also see that the inflow and outflow of BTC and ETH to exchanges has increased throughout the year, indicating a general expansion of spot trading interest. Notably, the growth rate of BTC trading volume has significantly outpaced that of ETH trading volume, consistent with the observation of Bitcoin's rising dominance. It is common for Bitcoin to lead investor confidence out of a prolonged bear market, and this chart helps visualize that phenomenon.

This year, the number of Bitcoin transactions reached an all-time high, primarily due to the unexpected growth of 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)

? Currency transaction volume reached a multi-year high, nearly hitting the historical peak of 372.5k/day.

? Inscriptions transactions added an additional 175,000 to 356,000 transactions per day on top of classic currency transactions.

The vast majority of inscriptions tend to be text-based and are related to a novel token standard known as BRC-20. At its peak, the number of inscriptions on the Bitcoin network exceeded 300,000 per day, far surpassing the peak of 172,000 per day for image-based inscriptions in April (images are larger, thus the cost of inscriptions increases with fees).

Due to this new buyer of Bitcoin block space, miner fee revenue has significantly increased, with several blocks in 2023 paying fees exceeding the 6.25 BTC subsidy. There have been two instances of significant fee spikes this year, with fees currently accounting for about a quarter of miner revenue. This is comparable to the euphoric phases of the bull markets in 2017 and 2021.

Interestingly, while inscriptions account for about 50% of confirmed transactions, they surprisingly occupy only about 10% to 15% of block space. This is a result of the smaller size of text files and the nuances related to SegWit data discounts (a topic we introduced in WoC-39).

This year, inscriptions contributed 15% to 30% of total miner transaction fee revenue. This highlights the non-intuitive nature of SegWit discounts, where inscription transactions consume a small portion of block space (in bytes) while paying a relatively large proportion of fees, yet also account for about half of all confirmed transactions.

In practice, inscriptions and SegWit data discounts allow miners to fit more transactions into the same maximum size block, thereby collecting more fees. If demand for inscriptions persists, the impact on miner revenue could significantly improve miner economics, especially with the upcoming fourth halving.

Cross-chain Bridges, Staking, and the Shanghai Upgrade

For Ethereum, on-chain activity has been somewhat subdued this year, with October again marking a significant turning point.

• Active addresses have remained relatively stable at around 390,000/day
• Transaction volume recently increased from 970,000/day to 1,110,000/day
• ETH transfer volume has increased from $1.8B/day to $2.9B/day

While ETH's market price has generally lagged behind the broader digital asset space, its ecosystem continues to expand, mature, and develop. In particular, the total value locked in the expanding Layer-2 blockchains has increased by 60%, with over $12B now locked in bridges.

These L2 chains are seeking to expand and extend Ethereum's block space while anchoring their data and finality to the Ethereum main chain to maintain their 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 the year, the amount of staked ETH has grown by 119%, with the number of ETH locked in staking protocols now exceeding 34.638 million. The Shanghai upgrade was also successfully launched in April, allowing stakers to complete withdrawals for the first time since the launch of the Beacon chain in December 2020, and reshuffling staking providers and setups.

Looking Ahead

Despite Bitcoin's incredible price performance, a large portion of Bitcoin remains dormant, reaching long-term holder status in investors' 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 for over 155 days, an increase of 825,000 BTC so far this year. This has also brought the supply of short-term holders down to a historical low of 2.317 million BTC.

As the market rebounds, the vast majority of investors' tokens have returned to "profit," whether due to turnover or prices rising above cost basis. The following chart shows how the total amount of "loss" tokens has decreased to around 1.9 million BTC, most of which are held by long-term holders who bought near the 2021 peak.

On the other hand, the "profit" supply now accounts for over 90% of the circulating supply, with the rebound in October pushing it above historical averages. Given that over 50% of the supply was underwater at the beginning of 2023, this is one of the fastest recoveries in history (second only to the rebound in 2019).

The following chart visually illustrates the change in the percentage of profitable supply for each calendar year since 2015. While the yearly breakdown is not perfect, the classic four-year Bitcoin cycle allows us to identify some interesting patterns:

? Bear Market/Recovery Phase, where tokens capitulate near the lows and return to profit, seeing the largest increase in profitable supply.

? Early Bull Market, where the overall upward trend allows most tokens to profit and rebound to new highs.

? Late Bull Market, where the market is at ATH levels, leading to slight positive to negative readings as all tokens are profitable and the market approaches exhaustion.

? Major Bear Market after Market Peak, where a large number of tokens fall into loss.

While the structure is simple, this framework does highlight the similarities between the progress made in 2015-16, 2019-20, and 2023 to date.

Finally, regarding investor profitability, 2023 has transitioned long-term holders, short-term holders, and regular holders from unprofitable to moderately profitable states. The NUPL metrics for each cohort have not yet reached exciting highs but are also significantly above their respective breakeven levels.

Maturing Derivatives Market

A notable feature of the 2020-23 cycle is that the futures and options markets have become the preferred venues for price exposure and liquidity. 2023 has proven to be a significant year in this maturation process, as the open interest in the options market has grown to levels comparable to or even exceeding that of the futures market.

Currently, both have open interests ranging from $16B to $20B, with Deribit continuing to dominate the options space (90%+). This suggests increasing institutional interest in Bitcoin, as traders and positions leverage the options market to deploy more complex trading, risk management, and hedging strategies.

Within the futures market, a notable shift in dominance has also occurred, with the open interest held by the regulated Chicago Mercantile Exchange (CME) surpassing that of the offshore exchange Binance for the first time in history. October appears to have once again been a significant moment in this phase transition, indicating an influx of institutional capital.

In October, the futures trading volume for both BTC and ETH increased, with total daily trading volume reaching $52B/day. Bitcoin contracts accounted for about 67% of the trading volume, while Ethereum contracts accounted for 33%.

Cash and arbitrage yields in the futures market experienced three distinct phases throughout the year, which also tells the story of capital inflow into this space:

• From January to August, yields fluctuated around 5%. This was largely in line with short-term U.S. Treasury yields, making it relatively unattractive given the additional risks and complexities of trading.
• From August to October, yields fell below 3% after the sell-off to $26,000, and the volatility environment was unexpectedly low.
• Starting in October, yields broke above 8%. With the futures basis currently maintaining a level above U.S. Treasuries by 300 basis points, market maker capital now has the incentive to return to the digital asset space.

Stablecoin Supply

A relatively new phenomenon in the last cycle has been the significant role that stablecoins play in market structure, becoming the preferred quote currency for traders and a major source of market liquidity.

Since March 2022, the total supply of stablecoins has been declining, down -26% from its peak, becoming a major headwind for market liquidity. This has been caused by a combination of regulatory pressures (SEC's allegations against BUSD as a security), capital rotation (favoring U.S. Treasuries over interest-free stablecoins), and waning investor interest in the bear market.

However, October marked a key point, with the total supply of stablecoins bottoming out at $120B and beginning to grow at a rate of up to 3% per month. This is the first expansion of stablecoin supply since March 2022 and may also signal a return of investor interest.

The relative dominance among various stablecoins has also changed significantly between 2022 and 2023. The previously rising dominance of stablecoins like USDC and BUSD has significantly shrunk, with BUSD entering a redemption-only mode and USDC's dominance dropping from 37.8% in June 2022 to 19.6%.

Tether (USDT) has once again become the largest stablecoin, with total supply climbing to over $90.6B, capturing 72.7% of the market share.

Finally, we can compare the 30-day changes in the realized market cap of BTC and ETH with the changes in total stablecoin supply. These three metrics help visualize and measure relative capital flows and rotations between sectors.

October again proved to be a critical moment, with capital inflows for all three major assets turning positive, coinciding with the market breaking through the critical level of $30,000, the expansion of institutional interest in the derivatives market, and net capital inflows into the three major digital assets.

Summary and Conclusion

2023 has been starkly different from the devastating deleveraging and market downturn trends of 2022. Instead, this year has seen a resurgence of interest in digital assets, with strong performance and new on-chain artifacts emerging in the form of Bitcoin inscriptions.

Bitcoin supply is currently tightly held by long-term holders, with most investors now holding profitable Bitcoin. With the increasing likelihood of U.S. ETF launches in early 2024 and the Bitcoin halving set to occur in April, an exciting year ahead is well-prepared.