Bitcoin 2023 Annual Review: Key Trends and Breakthrough Developments

Introduction

2023 is one of the most important years in Bitcoin's history. Bitcoin Ordinals have pioneered a brand new concept and sub-market. Bitcoin's layer two networks, sidechains, and scaling solutions have once again attracted market attention. Traditional financial institutions have begun to view BTC as a formal asset class, with multiple institutions submitting applications for spot BTC ETFs that were approved in early 2024. More importantly, BTC seems to be gradually recovering from the most severe bear market in the crypto space, becoming stronger after events like Luna and FTX. Overall, the current state of Bitcoin is exciting.

This report will focus on several key trends and areas of Bitcoin in 2023. It should be noted that this is not an exhaustive list of all developments in Bitcoin for 2023, as there are too many advancements to list individually. Whether it's through small payments via the Lightning Network, trading in the inscription market, or using BTC on sidechains, the development of Bitcoin in 2023 has reached unprecedented levels. The rigidity of Bitcoin that we saw in 2021 and 2022 seems to be a thing of the past.

Network

We first focus on the operational status of Bitcoin as a network. Bitcoin is the largest decentralized currency network in the world, so closely monitoring the health of the network is crucial. In 2023, almost all indicators of the Bitcoin network began to improve.

The performance of computing power in 2023 is surprising. Despite the poor performance of BTC prices in 2022, the computing power continued to reach new highs before 2023. Since the beginning of 2022, Bitcoin's computing power has doubled. Higher computing power indicates a more secure network and also reflects miners' confidence in the network.

The number of active BTC addresses showed a growth trend in 2023, but seems to have stabilized at around 1 million at the beginning of 2024.

In 2023, we saw an improvement in Bitcoin's transaction fee revenue. The emergence of inscriptions and new demand for block space had a significant impact on Bitcoin. First, we observed a sharp rise in transaction fees at the beginning of the year. After the initial surge, the fee levels stabilized, but remained noticeably higher than previous levels.

The emergence of inscriptions helps to address the transaction fee challenges of Bitcoin. Fundamentally, inscriptions allow users to store arbitrary data on the Bitcoin network. This small technological advancement has led to an explosive increase in the demand for Bitcoin block space. The average block size nearly doubled in 2023.

The demand for block space can also be seen from the Bitcoin mempool. Starting from the first quarter of 2023, the Bitcoin mempool has seen explosive growth. The mempool suddenly became congested with a large number of transactions trying to inscribe on Sats. While a congested mempool may be a good thing for struggling miners, those making small transactions find it frustrating.

The popularity of inscriptions has led to a sharp decrease in small BTC transfers, which seems to be the reason we are seeing a decline in BTC transaction volume after the boom in inscriptions. Bitcoin's transaction volume has fallen to levels not seen since 2020.

The increase in inscription demand and transaction fees has led to Bitcoin's FRM( fee ratio being at its lowest level in a period of time. FRM measures the multiple of transaction fees required for a chain to replace its block rewards. In 2023, FRM plummeted from 80 times to between 12 and 40 times, getting closer to Bitcoin's levels during 2020-2021. Lower FRM levels are more promising.

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Overall, the network data of Bitcoin paints a vivid picture. Bitcoin seems to be moving beyond the simple concept of HODL) holding( and entering more practical application scenarios. The demand for Bitcoin's block space has created new sources of transaction fees and users for the network. Thanks to these new sources of fees, the network is now as busy and secure as ever. Despite some skepticism, by the end of 2023, inscriptions have undoubtedly proven to be a boon for the entire Bitcoin network.

Bitcoin Entity

) Exchange

The year 2023 continues the trend that started in 2020, where BTC has been continuously flowing out of exchanges. The BTC balance on exchanges is at its lowest level since 2018, slightly above 2 million. This may be related to the decline in user trust towards centralized entities following the FTX incident, as well as the rise of Ordinals.

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) miner

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

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The income of miners consists of two parts: block rewards and transaction fees. Looking back since 2016, we have seen that the income miners earn from transaction fees is usually just a small portion of the block rewards, rarely exceeding 10%. The transaction fees generated by inscriptions may bring some hope to miners, but whether inscriptions can fundamentally solve the transaction fee problem of Bitcoin remains questionable.

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Unless the price of BTC rises significantly, miners' income will be severely impacted in the upcoming halving. Since the last halving, Bitcoin has only generated about 50 BTC per day on average through transaction fees, which is only 1/9 of the losses miners face during the halving. From a very practical perspective, the halving will reduce miners' income by half.

Interestingly, the halving makes inscriptions more important for the long-term success of Bitcoin. As the block reward halves around April 2024, the proportion of fees in miner income will be larger than before. As a new important source of fees for Bitcoin, inscriptions will be more crucial than ever. On average, inscriptions account for about 13% of Bitcoin fees. During certain frenzied periods, inscriptions may even account for more than a quarter of the fees.

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) Institutions and ETFs

2023 is a booming year for Bitcoin. Respected and reputable companies are lining up to bring BTC into the traditional market. "Serious" investors are considering BTC as a viable asset for the first time.

In 2023, we saw significant progress between Bitcoin and institutions. The approval of the spot BTC ETF is a strong signal that BTC and other crypto asset markets are an important asset class. The spot ETF opens the door to a large amount of capital. Investors can purchase the ETF through banks, financial applications, company 401Ks, etc. The spot BTC ETF firmly establishes BTC in the mainstream and opens up a huge pool of liquidity for it.

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The Evolution of Bitcoin

) Ordinals and BRC20

One of the most interesting developments in Bitcoin in 2023 is the inscription technology ###Ordinals( developed and released by Casey Rodarmor. Inscriptions use Taproot to allow users to store any data on the Bitcoin network and bind or inscribe the data onto specific Sats. Once launched, the market quickly embraced inscriptions, and as of the release of this report, there are over 59M inscriptions on the Bitcoin network.

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Anonymous developer Domo launched a simple token standard BRC20 using inscriptions, creating a sub-industry with a market value of over $1 billion. BRC20 is super simple; they are JSON text files embedded by users into sats, used to describe the three token functions: deploy, mint, and transfer. These simple functions have now built a multi-billion dollar industry.

The BRC20 market has been an interesting market in 2023. Over 56,000 BRC20 tokens have been deployed. $ORDI is the first BRC20 token to be listed on a centralized exchange, reaching an all-time high of $82. The performance of $ORDI is a strong endorsement from the market for BRC20.

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However, it should be noted that BRC20 and Ordinals are not without controversy. Many Bitcoin believers consider Ordinals and BRC20 as garbage, harmful to the chain, and a departure from Bitcoin's original intent. Nevertheless, we expect that Ordinals will continue to be controversial, but due to their incentives and the strength of the market, they may continue to exist.

) DeFi and scalability

The adoption of the Lightning Network stagnated in 2023, as the narrative of Bitcoin as a neutral payment rail gradually faded. With Ordinals and BRC20 driving up transaction fees, the Lightning Network may find its product market in basic BTC transactions rather than as a payment channel. 2023 was a neutral year for the Lightning Network, with its capacity and number of nodes remaining relatively stable.

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Bitcoin Rollup has recently attracted a lot of market attention and influx of funds. We have seen the release of Citrea, a zk-rollup incubated by Chainway, which utilizes BitVM. We will further focus on the development in this field in 2024.

Outlook for 2024

2023 is an important year for Bitcoin, and 2024 seems poised to continue these positive trends. Ordinals have shaken the core of Bitcoin, but the community is still working to resolve the debates surrounding Ordinals. Institutional investors have opened new channels for capital inflow into Bitcoin through ETFs. We look forward to seeing further developments for Bitcoin in 2024.