Bitcoin Shines in 2023: Key Trends and Sector Review

2023 will become one of the most important years in Bitcoin's history. Bitcoin inscriptions have opened up a new concept and sub-market. Bitcoin's layer two networks, sidechains, and scaling solutions have reignited market interest. Traditional finance is beginning to view BTC as a serious and valid asset class, with over a dozen spot BTC ETF applications submitted in 2023, and multiple ETFs expected to be approved in early 2024. More importantly, BTC seems to be emerging from the most severe bear market the crypto market has experienced and is becoming stronger. The current state of Bitcoin is exciting.

This report focuses on several key trends and areas where Bitcoin shone brightly in 2023. This is not an exhaustive list of all developments in Bitcoin for 2023, as too many things are difficult to enumerate. Thousands of people are working towards their Bitcoin vision. Whether through the Lightning Network, inscription markets, small payments via Bitcoin sidechains, or efforts to bring BTC to other chains, the development of Bitcoin in 2023 has reached a frenzy level. The rigidity of Bitcoin seen in 2021 and 2022 seems to be a thing of the past.

Network

First, focus on the operation of the Bitcoin network. It is forgivable if we sometimes forget that Bitcoin is much more than just the BTC price. Bitcoin is the largest decentralized currency network in the world, so closely monitoring the network's health is crucial. Buying BTC is, to some extent, a bet on the Bitcoin network attracting more users and capital. Without growth, Bitcoin will fail. Fortunately, almost all aspects of the Bitcoin network began to improve in 2023.

The computing power in 2023 is astonishing. Although BTC performed relatively poorly in 2022, the computing power has continuously broken historical highs before 2023. Since the beginning of 2022, Bitcoin's computing power has doubled, which is noteworthy for two reasons:

1. It represents the security level of Bitcoin. Generally speaking, the higher the hash rate, the more secure Bitcoin is ( assuming it comes from new miners, rather than just existing miners ).

2. A higher hash rate indicates that miners have confidence in the network. If mining is unprofitable or the return period is too long, the hash rate is expected to decline.

The number of active BTC addresses significantly decreased from a peak of 1.15 million in 2021. As BTC prices stagnated, over 300,000 users disappeared within just a few weeks. Even the new high set in November 2021 did not bring back the lost users. The number of active BTC addresses remained unchanged throughout 2022. However, in 2023, we saw a growing trend in active BTC addresses. But as we enter 2024, the growth seems to have stagnated, with active addresses stabilizing around 1 million.

In 2023, the fee income from Bitcoin has improved. Bitcoin faces a problem: at some point in the future, transaction fees will replace block rewards, continuing to pay miners to secure the network. Unfortunately, Bitcoin's fee income has historically been too low to replace block rewards. However, 2023 has brought some new hope for addressing this challenge.

The inscription and the new demand for block space have had a significant impact on Bitcoin. First, we saw a sharp increase in transaction fees earlier this year. After the initial spike, the fee levels have stabilized, but still remain noticeably higher.

A major breakthrough in addressing the Bitcoin transaction fee challenge is inscriptions. We will discuss this in detail later, but fundamentally, inscriptions allow users to store arbitrary data on the Bitcoin network. Like regular transactions, users must pay a fee to inscribe data. This small technological development has led to an explosive increase in demand for Bitcoin block space. At the beginning of 2023, people were inscribing data on thousands of sats. Subsequently, people invented a simple token standard BRC20 using inscriptions, which further increased the demand for block space. The demand for storing data on Bitcoin was so great that the average block size nearly doubled in 2023.

We can clearly see the demand for block space from the Bitcoin mempool. Starting from the first quarter of 2023, the Bitcoin mempool experienced explosive growth. The mempool was suddenly clogged with thousands of transactions attempting to inscribe inscriptions onto Satoshis. When bots stifled users' ability to create BRC20s, fees briefly dropped again ( to be detailed later ), but the mempool has become congested once more. For struggling miners, a congested mempool may be a blessing, but those making small transactions find it frustrating. For some, the chain is nearly unusable.

The explosive popularity of inscriptions seems to be the reason we are seeing a collapse in BTC trading volume after the boom of inscriptions. The Bitcoin trading volume (, which measures the total amount of successful on-chain BTC transfers ), has dropped to levels not seen since 2020, and the downward trend appears to be continuing.

The increase in demand and costs for inscriptions has led to Bitcoin's FRM( Fee Ratio Multiple, the fee ratio multiple ), reaching its lowest level in some time. FRM measures the multiple of fees required for a chain to replace block rewards; the lower, the better. In 2022, Bitcoin's FRM hovered between 40-120 times, meaning that 40-120 times the fees were needed to replace block rewards. The surge in inscriptions has begun to push this number down. In 2023, FRM plummeted from 80 times to between 12-40 times, closer to levels seen in 2020-2021. Lower FRM levels are more promising; if you are a long-term believer in Bitcoin, you will want to see this downward trend continue.

Bitcoin network statistics paint a vivid picture, largely dependent on widespread adoption. Bitcoin seems to be transcending the HODL( holding) meme, entering scenarios we commonly use. When inscriptions first entered the market, we predicted today's situation. The demand for Bitcoin block space has created new sources of fees and users for the chain. To some extent thanks to the new sources of fees, the network is now as busy and secure as ever. Despite some naysayers, by 2023, inscriptions have undoubtedly proven to be a boon for the entire Bitcoin network.

However, we believe it is necessary to point out that the 12-40x FRM is still high. Bitcoin still faces challenges regarding its security model and how to respond when block rewards end. However, inscriptions are a step in the right direction. If the Bitcoin community can find more sources of fees, the future of Bitcoin will be very promising.

Bitcoin Entity

Despite being one of the most decentralized cryptocurrencies, large entities and institutions still have a huge influence on Bitcoin. To gain a comprehensive understanding of Bitcoin, we need to analyze the behaviors of some BTC whales.

exchange

One of the most commonly discussed indicators by analysts is the BTC balance on exchanges. The reason is simple: since almost all BTC transactions occur on centralized exchanges, a decrease in exchange BTC means a reduction in available BTC for purchase, leading to a supply shortage and potentially driving up BTC prices. In this regard, 2023 has continued the trend that began during the COVID-19 crash in 2020. In other words, BTC has been flowing out of exchanges. The exchange BTC is at a level not seen since 2018, slightly above 2 million coins.

There have been rumors that the exchange has re-mortgaged BTC. After the FTX explosion, BTC may continue to flow out of the exchange, as holders become increasingly unwilling to trust centralized entities. The explosion of inscriptions may also play a role in this trend.

miner

Next, we will focus on miners in the Bitcoin physical journey. Bitcoin miners are a fundamental part of the Bitcoin ecosystem. Without industrial-scale mining, the security of Bitcoin would be greatly reduced. However, the cost of security is not cheap. The network pays miners security fees in BTC. For this reason, miners rely on BTC for operations, which could be a source of selling pressure on BTC. Moreover, the behavior of miners also reflects their market position; if there is a large amount of selling, it could indicate a belief in a downward trend. If miners choose to continue holding BTC, it suggests they believe the price may still rise.

In 2023, miners typically held more BTC than they sold, although not by much. During the collapse of FTX, miners sold a large amount of BTC, but starting from 2023, they began to hoard BTC(, although they have been selling ) in the fourth quarter of 2023 and the first quarter of 2024.

Several large mining companies have gone public, and any analysis of the BTC mining situation should focus on these companies. If mining companies suffer heavy losses, the security of Bitcoin will be affected due to shutdowns.

The performance and lifecycle of miners are primarily assessed by their income. BTC miners' income consists of two independent sources: block rewards and transaction fees. As we are sure the readers know, Satoshi Nakamoto programmed Bitcoin to reward miners, which we refer to as block rewards. However, approximately every four years, the block reward is halved. People often view the reduction in block rewards as a significant positive catalyst. However, miners may feel some fear regarding the next halving.

Most of the income for BTC miners has historically come from Bitcoin block rewards. Looking back to 2016, we see that the income miners earned from transaction fees was usually only a small part of their block rewards. Transaction fees sometimes accounted for less than 1% of miners' income and have rarely exceeded 10% since 2016. The transaction fees generated by inscriptions may bring some hope to miners, but whether inscriptions can fundamentally solve the Bitcoin transaction fee problem remains questionable.

Unless the BTC price rises significantly, miners' income will be severely impacted. Bitcoin has not generated enough transaction fees to replace the daily income reduction of about 450 BTC that will come from the halving. Since the last halving, Bitcoin has only been able to generate about 50 BTC daily through transaction fees, which is 1/9 of what miners lose in the halving. From a very practical perspective, the halving will cut miners' income in half.

Interestingly, the halving makes inscriptions even more important for the long-term success of Bitcoin. With the block reward halving around April 2024, the proportion of transaction fees in miner income is greater than before, serving as a new important fee for Bitcoin.