Glassnode: Why are ETFs seeing net inflows, but Bitcoin prices stagnant?

Original title: "Dissecting Divergences"
Original author: CryptoVizArt, UkuriaOC, Glassnode
Original translation: Ladyfinger, BlockBeats
Editor's note:

In this in-depth analysis, we focus on multiple key dynamics in the Bitcoin market, from the evolution of technical protocols to macro changes in market structure. It is particularly noteworthy that although the inflow of funds from US spot ETFs has brought vitality to the market, the market-neutral cash and carry trading strategy is balancing the buyer's momentum, resulting in a neutral price impact. In addition, the decline in the number of active addresses on the Bitcoin network is in sharp contrast to the surge in its trading volume, and the reasons behind this are thought-provoking. By analyzing the impact of emerging technologies such as the Runes protocol, we reveal its direct role in the decline in the number of active addresses. At the same time, we also observe that the number of Bitcoins held by major entities and the important role of Coinbase in the market have jointly shaped the current market landscape.

While US ETF inflows have been impressive, market-neutral cash-and-carry trades appear to be mitigating buy-side momentum, with non-arbitrage demand needed to further drive prices higher. We are also analyzing the significant divergence between the decline in active addresses and the surge in trading volume.

BlockBeats Note: Basis trading, also known as cash-and-carry trade, refers to the simultaneous purchase (sale) of a spot bond and sale (purchase) of a bond futures. Basis trading strategies are based on the difference in the price of an asset in two different markets (such as the difference between the spot market and the futures market) and can generate returns if executed properly. Generally speaking, traders need to manage two different contracts at the same time when executing basis trading strategies, which is a complex and lengthy process.

Summary

· With the emergence of the Runes protocol, there has been an unexpected divergence between the decline in active addresses and the increase in trading volume.

· Currently, major tokenized entities hold a staggering 4.23 million BTC, accounting for more than 27% of the adjusted supply, and US spot ETFs now have a balance of 862,000 BTC.

· Basis trading structures appear to be a significant source of demand for ETF inflows, with ETFs being used as a tool to gain long spot exposure, while net short positions in Bitcoin are accumulating larger and larger in the CME futures market.

Activity Differences

On-chain activity metrics, including active addresses, transaction volume, and transaction value, are key tools for evaluating the development and performance of blockchain networks. In mid-2021, China imposed restrictions on Bitcoin mining, which led to a sharp drop in the number of active addresses on the Bitcoin network, from an average of over 1.1 million daily active addresses to just 800,000.

The Bitcoin network is currently experiencing a contraction in activity, and the motivations behind it are very different from those in the past. In the following sections, we will dive into emerging concepts such as inscriptions, ordinals, BRC-20 tokens, and runes, and how they have fundamentally changed the way on-chain analysts understand and predict future trends in activity metrics.

Real-time Data

While historically strong momentum in market pairs has typically been accompanied by growth in active addresses and daily transaction volume, this trend is currently deviating.

While the number of active addresses appears to be declining, the Bitcoin network is processing transactions at near all-time highs. The current average monthly transaction volume has reached 617,000 transactions per day, 31% higher than the annual average, indicating relatively high demand for Bitcoin block space.

Real-time data

Comparing the recent decline in the number of active addresses with the share of inscriptions and BRC-20 tokens traded, we can observe a strong correlation. It is particularly noteworthy that the number of inscriptions has also shown a sharp downward trend since mid-April.

This shows that the decline in the number of active addresses is mainly due to the reduced use of inscriptions and ordinals. It is important to note that in this space, many wallets and protocols reuse the same address, and if an address has multiple activities in a day, it is not counted multiple times. Therefore, even if an address generates ten transactions in a day, it is still only counted as one active address in the statistics.

Real-time data

To explain the decline in inscription activity, we can look to the emergence of the Rune Protocol, which claims to be a more efficient way to introduce fungible tokens on Bitcoin. The Rune Protocol went live at the time of the block halving, which explains the drop in the number of inscriptions in mid-April.

Runes use a different technical mechanism from inscriptions and BRC-20 tokens, using the OP_RETURN field (80 bytes) to encode arbitrary data on the blockchain, thereby significantly reducing the need for block space while maintaining data integrity.

Since its launch on April 20, 2024, when Bitcoin was halved, the Rune protocol has quickly gained popularity in the market, with daily transaction demand increasing to 600,000 to 800,000 transactions, and the transaction volume has remained at a high level since then.

Image Indicators

Currently, Rune-related transactions account for as much as 57.2% of daily transaction volume, significantly surpassing BRC-20 tokens, ordinals, and inscriptions. This phenomenon suggests that users' speculative interest may have shifted from inscriptions to the emerging Rune market.

Graphics

Differential ETF Demand

A particular concern in the market recently has been the stagnant sideways price action seen despite the massive inflows into US spot ETFs. To drill down and assess the demand side of ETFs, we can compare the current holdings of ETFs (862k BTC) to other major, tokenized entities in the market.

The US spot ETF holdings are 862,000 BTC , Mt. Gox creditors hold 141,000 BTC , The US government holds 207,000 BTC , The US spot ETF holdings are 862,000 BTC , All exchanges hold 2.3 million BTC in total , while miners (excluding Patoshi) own 706,000 BTC . The combined holdings of these major entities are approximately 4.23 million BTC, or 27% of Bitcoin’s adjusted circulating supply, which is the total supply that deducts Bitcoin that has not been moved for more than seven years.

Real-time data

Coinbase, as a leading cryptocurrency platform, controls a large exchange asset, while its custody service also manages the Bitcoin holdings of the US spot ETF. It is estimated that Coinbase Exchange and Coinbase Custody currently hold approximately 270,000 and 5.69 million BTC, respectively.

Image Indicators

Coinbase has an increasing influence on the market price formation mechanism as it serves ETF clients and traditional on-chain asset holders. Looking at the dynamics of large deposits in Coinbase exchange wallets, there has been a significant increase in deposit transactions after the launch of the ETF.

Most of the deposited Bitcoin is closely related to the continuous outflow of the GBTC address group, which has become a key reason for the oversupply of Bitcoin throughout the year.

Real-time data

In addition to the selling pressure from GBTC as the bitcoin market hits new all-time highs, there is another factor that has recently dampened demand for U.S. spot ETFs.

Looking at CME Group futures markets, open interest reached a record high of $11.5 billion in March 2024 and has since remained above $8 billion. This trend may reflect the increasing use of cash and carry arbitrage strategies by traditional market participants.

This arbitrage strategy takes a market-neutral stance and involves the simultaneous purchase of a long spot position and the sale (short) of a futures contract for the same asset, the latter of which is traded due to the presence of a premium.

Real-time Data

Observations show that investors classified as hedge funds are building increasingly large net short positions in Bitcoin.

This suggests that the basis trade structure may be a key driver of ETF inflows, using ETFs as a way to gain access to long spot Bitcoin. Since 2023, CME Group exchanges have seen significant growth in both open interest and market leadership, demonstrating their position as the preferred platform for hedge funds to short futures.

Currently, hedge funds hold a net short position of $6.33 billion in CME’s Bitcoin futures market and $97 million in the Micro CME Bitcoin futures market.

CME COTs - THE BLOCK

Summary

The disparity between activity indicators has been significantly exacerbated by the popularity of the Rune Protocol, which enables multiple transactions from a single address through address reuse. At the same time, cash and carry arbitrage between US spot ETF products and futures shorts traded through CME Group exchanges has effectively offset ETF inflows. This market phenomenon has led to a neutral impact on prices, suggesting that the market needs natural buying (that is, real buyers) of a non-arbitrage nature to drive prices higher.

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