From Divergence to Consensus: 2023 Bitcoin Ecosystem Review and Outlook

2023 will become one of the most important years in Bitcoin's history. Bitcoin Ordinals has opened up a whole new concept and sub-market for Bitcoin. Bitcoin Layer 2, sidechains, and scaling solutions have reignited interest among market participants. The traditional financial market is beginning to view BTC as a serious and effective asset class, with over a dozen spot BTC ETF applications submitted in 2023, many of which are expected to be approved in early 2024. However, most importantly, BTC seems to be emerging from one of the worst bear markets the crypto market has experienced. BTC has withstood the storms of the Luna, FTX, Voyager, and Celsius collapses and is even stronger than before, as evidenced by the market attention, ecological vitality, and new technologies we are seeing. In summary, the current state of Bitcoin is exciting.

Network

The first area we need to focus on is how Bitcoin operates as a network. If we sometimes forget that Bitcoin is far more than just the BTC price, then crypto enthusiasts can be forgiven. Bitcoin is the world's largest decentralized currency network, so closely monitoring the health of the network is very important. To some extent, buying BTC is a bet on the Bitcoin network's ability to absorb more users and capital. Without growth, Bitcoin will fail. Fortunately, in 2023, nearly everything in the Bitcoin network began to get back on track.

The computing power in 2023 is astonishing. Due to BTC's relatively poor price performance in 2022, we were surprised to find that the computing power has continuously broken historical highs before 2023. Since the beginning of 2022, Bitcoin's computing power has doubled, and its hash rate is noteworthy for two reasons:

1. It represents the security level of Bitcoin. Generally speaking, the higher the hash value, the more secure the Bitcoin is ( assuming the hash value comes from new miners, and not just all existing miners ).
2. A higher hash value indicates the miners' confidence in the network. If mining is not profitable or the profit cycle is too long, we expect the hash rate to decline.

The number of active BTC addresses significantly declined from a peak of 1.15M addresses in 2021. With the BTC price stagnating, over 300,000 users disappeared within a few weeks. Even reaching a new ATH in November 2021 did not bring back the lost users. Active BTC addresses remained unchanged throughout 2022. However, in 2023, we saw a growth trend in active BTC addresses. Yet, as we enter 2024, the growth trend seems to have stalled, with active addresses stabilizing around 1M.

In 2023, we saw an improvement in the fee revenue of Bitcoin. There is a problem with Bitcoin. The issue is that at some point in the future, the fees of Bitcoin will replace its block rewards to continue paying miners for securing the network. Unfortunately, the fee revenue of Bitcoin has historically been too low to replace the block rewards. However, 2023 has brought some new hope to address this challenge.

The emergence of inscriptions and new demand for block space have had a significant impact on Bitcoin. Firstly, we observed a sharp increase in fees at the beginning of this year. After the initial surge, the fee levels tended to stabilize, but there was still a notable increase in fees.

A significant advancement in addressing the Bitcoin fee challenge is inscriptions. We will discuss them in detail later, but fundamentally, inscriptions allow users to store any arbitrary data on the Bitcoin network. Like regular transactions, users must pay fees 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 inscribed data on thousands of Sats. Then, people came up with a simple token standard BRC20 using inscriptions, which led to even more 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 easily see the demand for block space in the Bitcoin mempool. Starting from the first quarter of 2023, the Bitcoin mempool has exploded in growth. The mempool was suddenly clogged with thousands of transactions trying to inscribe their inscriptions on Stats. When the bots stifled users' ability to create BRC20s, fees briefly dropped again, ( will be detailed later, ), but the mempool has become congested once more. For struggling miners, a congested mempool might be a godsend, but those making small transactions find it frustrating. For some, the chain has become nearly unusable.

The surge in 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 boom in inscriptions. The trading volume of Bitcoin (, which measures the total amount of successful on-chain BTC transfers ), has dropped to levels not seen since 2020, and it appears that the downward trend will continue.

The increase in demand and costs for inscriptions has led Bitcoin's FRM to its lowest level in a period of time. FRM, or Fee Ratio Multiple, measures the multiple of fees required for a chain to replace its block rewards. The lower the FRM, the better. In 2022, Bitcoin's FRM hovered between 40x and 120x, meaning Bitcoin needed 40 to 120 times the fees to replace block rewards. The surge in inscriptions has begun to drive this number down. In 2023, FRM plummeted from 80x to between 12x and 40x, closer to the levels Bitcoin saw between 2020 and 2021. A lower FRM level is more promising, and if you are a long-term believer in Bitcoin, you would hope to see this downward trend continue.

The network statistics of Bitcoin paint a vivid picture, largely dependent on the scale of adoption. Bitcoin seems to be moving beyond the HODL( meme, entering scenarios we often use. When inscriptions first entered the market, we predicted the scene you see today. The demand for block space for Bitcoin has created new sources of fees and users for the chain. To some extent, thanks to these 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 note that the FRM remains high between 12x and 40x. Bitcoin still faces challenges regarding its security model and what it will do when the block rewards end. But 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 most common indicators that analysts like to discuss is the exchange BTC balance. The reason is simple: since almost all BTC transactions occur on centralized exchanges, a decrease in the exchange's BTC means less BTC available for purchase, leading to a supply shortage, which could cause the BTC price to rise. At this point, 2023 continues the trend that began during the COVID-19 crash in 2020. In other words, BTC has been flying off exchanges. The exchange's BTC is at a level we haven't seen since 2018, slightly above 2 million.

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There have been persistent rumors that exchanges have re-mortgaged BTC. After the FTX explosion, BTC might continue to fly away from exchanges as BTC holders are increasingly unwilling to trust centralized entities. The explosion of inscriptions may also have played a role in this trend.

) miner

Next, we will focus on miners in the Bitcoin physical journey. Bitcoin miners are a fundamental component of the Bitcoin ecosystem. Without industrial-scale mining, the security of Bitcoin would be significantly reduced. However, the cost of security is not cheap. The network pays miners' security fees in BTC. Because of this, miners rely on BTC for their operations, which may be a source of selling pressure on BTC. Moreover, the behavior of miners also reflects their market position; if there is a large sell-off, it may indicate a belief in a downward trend. If miners choose to continue holding BTC, it indicates that 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 in 2023, they began to hoard BTC###, although they continued to sell( during the fourth quarter of 2023 and the first quarter of 2024.

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Several large mining companies are publicly listed, and any analysis of the BTC mining situation should pay attention to these companies. If mining companies suffer significant losses, the security of Bitcoin will be affected due to shutdowns.

Regarding the performance and lifecycle of miners, the most important thing is to look at their income. BTC miners' income consists of two independent sources: block rewards and fees. As we are sure the readers know, Satoshi Nakamoto programmed Bitcoin to reward miners, which we call block rewards. However, approximately every four years, the block rewards are halved. People usually see the reduction of block rewards as an important positive catalyst. However, miners may feel somewhat fearful about the next halving.

Most of the income for BTC miners has always come from Bitcoin block rewards. Looking back to 2016, we saw that the income miners received from fees was usually just a small portion of the block rewards. Fees sometimes accounted for less than 1% of miners' income, and have rarely exceeded 10% since 2016. The fees generated by inscriptions may bring some hope to miners, but whether inscriptions can fundamentally solve Bitcoin's fee problem remains questionable.

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Unless the price of BTC rises significantly, miners' income will be severely impacted. Bitcoin has not generated enough fees to replace the daily reduction of about 450 BTC in income that the halving will bring. Since the last halving, Bitcoin has only averaged about