2023 Bitcoin Report: Key Trends and Areas of Development

Introduction

2023 will become one of the most important years in Bitcoin's history. Bitcoin inscriptions have opened up a new concept and sub-market. The Bitcoin layer 2 networks, sidechains, and scalability solutions have rekindled market interest. Traditional finance is beginning to view BTC as a serious asset class, with multiple spot BTC ETF applications submitted in 2023, some of which are expected to be approved in early 2024. Most importantly, BTC seems to be recovering from the most severe bear market, showing stronger performance after the collapses of Luna, FTX, and others. Overall, the current state of Bitcoin is exhilarating.

This report focuses on several key trends and areas where Bitcoin has performed remarkably in 2023. This is not a complete list of all developments in Bitcoin for 2023, as there are too many things to account for. Countless individuals are working towards their vision for Bitcoin. Whether it's through the Lightning Network, the inscription market, or making small payments via Bitcoin sidechains, or introducing BTC to other chains, the development of Bitcoin in 2023 has reached a frenzied level. The rigid Bitcoin seen in 2021-2022 seems to be a thing of the past.

Network

First, focus on the operational status of Bitcoin as a network. Sometimes we may forget that Bitcoin is not just the BTC price. Bitcoin is the world's largest decentralized currency network, and closely monitoring its health is crucial. Buying BTC is, in some way, a bet on the Bitcoin network absorbing more users and capital. Without growth, Bitcoin will fail. Fortunately, almost all indicators of the Bitcoin network began to show positive development in 2023.

The performance of hash rate in 2023 is surprising. Although BTC performed relatively poorly in 2022, the hash rate continued to break new highs before 2023. Since the beginning of 2022, the Bitcoin hash rate has doubled, which is noteworthy for two reasons:

1. It represents the security level of Bitcoin. Generally, the higher the hash rate, the more secure Bitcoin is ( assuming it comes from new miners rather than existing miners ).
2. A higher hash rate indicates that miners have confidence in the network. If mining is unprofitable or the cycle is too long, the hash rate is expected to decline.

The number of active BTC addresses saw a significant drop from the peak of 1.15 million in 2021. As the price of BTC stagnated, over 300,000 users left within a few weeks. Even the all-time high in November 2021 did not bring back the lost users. The number of active addresses remained unchanged throughout 2022. However, in 2023, active addresses showed a growth trend. But entering 2024, the growth seems to have stagnated, stabilizing around 1 million.

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

The inscriptions and new demand for block space have had a huge impact on Bitcoin. Firstly, fees skyrocketed at the beginning of the year. After an initial surge, they have stabilized, but the level of fees remains significantly higher.

A significant advancement that helps address the Bitcoin fee challenge is inscriptions. Inscriptions allow users to store arbitrary data on the Bitcoin network. Like regular transactions, users must pay a fee to inscribe data. This technological development has led to an explosive increase in the demand for Bitcoin block space. At the beginning of 2023, data was inscribed on thousands of satoshis. Subsequently, the emergence of the BRC20 token standard further increased the demand for block space. The demand 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 in the first quarter of 2023, the Bitcoin mempool experienced explosive growth, suddenly clogged by thousands of transactions. When bots stifled users' ability to create BRC20, fees briefly dropped, but the mempool became congested again. For struggling miners, a congested mempool might be a blessing, but small transaction users find it frustrating. For some, the chain is nearly unusable.

The popularity of inscriptions has led to a sharp decrease in small BTC transfers, which seems to be the reason we are seeing the BTC trading volume collapse after the surge in inscriptions. The Bitcoin trading volume ( measuring the total amount of successful on-chain BTC transfers ) has dropped to levels not seen since 2020, and the downward trend may continue.

The increase in demand and costs for inscriptions has caused the Bitcoin FRM to reach its lowest level in a while. The FRM( cost ratio multiple ) measures the multiple of fees required for a chain to replace block rewards, the lower the better. In 2022, the Bitcoin FRM ranged between 40-120 times, meaning Bitcoin needed 40-120 times the fees to replace block rewards. The surge in inscriptions has begun to lower this figure. In 2023, the FRM plummeted from 80 times to between 12-40 times, closer to the levels of 2020-2021. A lower FRM is more promising, and if you are a long-term believer in Bitcoin, you hope to see this downward trend continue.

The network statistics of Bitcoin paint a vivid picture, primarily dependent on mass adoption. Bitcoin seems to be moving beyond the HODL( holding) meme into common use cases. We predicted today's situation when inscriptions appeared. 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 the naysayers, by 2023, inscriptions have undoubtedly proven to be a boon for the entire Bitcoin network.

However, it is important to note that the FRM is still high between 12-40 times. Bitcoin still faces challenges with its security model, as well as how to sustain itself after the block reward ends. However, the inscription is a step in the right direction. If the Bitcoin community can find more sources of fees, its future will be very promising.

Bitcoin实体

Despite being one of the most decentralized cryptocurrencies, large entities and institutions still have a significant impact on it. To fully understand Bitcoin, we need to analyze the behavior of some BTC whales.

exchange

One of the indicators frequently discussed by analysts is the exchange BTC balance. 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 that could drive up BTC prices. 2023 has continued the trend that started during the COVID-19 crash in 2020. BTC has been flowing out of exchanges. The exchange BTC is at levels not seen since 2018, slightly above 2 million.

There have been rumors that exchanges are re-mortgaging BTC. After the FTX implosion, BTC may continue to flow out of exchanges, as BTC holders are increasingly reluctant to trust centralized entities. The surge in inscriptions may also boost this trend.

miner

Next, let's focus on miners. Bitcoin miners are a fundamental component of the ecosystem. Without industrial-scale mining, the security of Bitcoin will significantly decline. However, the cost of security is not cheap. The network pays miners' security fees in BTC. Therefore, miners rely on BTC for operation, which could be a source of selling pressure on BTC. Moreover, miners' behavior also indicates market sentiment; significant sell-offs may signal a bearish outlook. If miners continue to hold BTC, it suggests they believe the price may rise.

In 2023, miners typically hold more BTC than they sell, although not by much. During the FTX collapse, miners sold a large amount of BTC, but at the beginning of 2023, they started hoarding BTC(, although they have continued to sell ) throughout 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 pay attention to these companies. If mining companies suffer heavy losses, the security of Bitcoin will be affected due to shutdowns.

Regarding miner performance and lifecycle, the most important aspect is to look at income. BTC miner income consists of two independent sources: block rewards and transaction fees. 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 of block rewards as an important positive catalyst. However, miners may feel apprehensive about the next halving.

Most of the income for BTC miners has come from block rewards. Looking back to 2016, we saw that the income miners earned from transaction fees was usually just a small part of the block rewards. Transaction fees sometimes accounted for less than 1% of miners' income and rarely exceeded 10% since 2016. The fees generated by inscriptions may bring hope to miners, but whether inscriptions can fundamentally solve the Bitcoin 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 caused by the halving. Since the last halving, Bitcoin has only been able to generate about 50 BTC per day through transaction fees, which is 1/9 of the loss miners incurred during the halving. In fact, the halving will cut miners' income in half.

Interestingly, the halving makes inscriptions even more important for the long-term success of Bitcoin. As the block reward halves around April 2024, transaction fees will constitute a larger portion of miners' income than before; as a new significant source of fees for Bitcoin, inscriptions will be more crucial than ever. Since their rise in February 2023, inscriptions have become an important component of Bitcoin's fee structure. On average, inscriptions account for about 13% of Bitcoin's fees. During certain frenzied periods, inscriptions could even make up over a quarter of the fees. At one point in 2023, inscriptions accounted for as much as 60% of Bitcoin's fees.

In light of the Bitcoin block reward halving, the fees generated by inscriptions will become increasingly important for miners hoping to make a living. Therefore, we expect that miners will become staunch supporters of the thriving inscription ecosystem.

Institutions and ETFs

In 2023, a noteworthy new entity for Bitcoin has emerged: traditional institutions. 2023 is a year of thriving for Bitcoin. No longer just without