2023 Bitcoin Report: Key Trends and Areas of Development

Introduction

2023 is one of the most important years in the history of Bitcoin. Bitcoin inscriptions have opened up a whole new concept and sub-market. Bitcoin Layer 2 networks, sidechains, and scaling solutions have rekindled market interest. Traditional finance has begun to view BTC as a serious asset class, with multiple institutions submitting spot BTC ETF applications, which are expected to be approved in early 2024. More importantly, BTC seems to be recovering from the most severe bear market in the crypto space, having withstood the tests of collapses such as Luna and FTX. Overall, the current state of Bitcoin is exciting.

This report will focus on several key development trends and areas of Bitcoin in 2023. This is not an exhaustive list, as there are too many things to track comprehensively. Thousands of people are working towards their Bitcoin vision. Whether through small payments via the Lightning Network, the inscription market, Bitcoin sidechains, or bringing BTC onto other chains, the development of Bitcoin in 2023 has reached a fever pitch. The rigid Bitcoin we saw in 2021-2022 seems to be a thing of the past.

Network

First, focus on the operation of the Bitcoin network. Bitcoin is the largest decentralized currency network in the world, and it is very important to closely monitor its health. Purchasing BTC is, to some extent, betting that the Bitcoin network can attract more users and capital. Fortunately, in 2023, all indicators of the Bitcoin network are developing positively.

The performance of computing power in 2023 is surprising. Although BTC performed poorly in price in 2022, computing power had already continuously reached 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 safer the Bitcoin.
2. Higher computing power indicates that miners have confidence in the network.

The number of active BTC addresses saw a significant drop from the peak of 1.15 million in 2021. Even the new high reached in November 2021 did not bring back the lost users. However, in 2023, we are seeing a growing trend in active addresses, stabilizing around 1 million.

In 2023, we saw an improvement in the transaction fee revenue of Bitcoin. 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 transaction fee revenue has historically been too low to replace block rewards. However, 2023 has brought new hope for addressing this challenge.

The inscriptions and the new demand for block space have had a huge impact on Bitcoin. We saw a significant surge in transaction fees earlier this year. After the initial spike, the fee levels tended to stabilize, but there is still a notable increase.

A significant advancement in addressing the Bitcoin transaction fee challenge is inscriptions. Fundamentally, inscriptions allow users to store arbitrary data on the Bitcoin network. Just like regular transactions, users must pay a fee to inscribe data. This small technological development has led to an explosive growth in the demand for Bitcoin block space. At the beginning of 2023, data was inscribed on thousands of sats. Then, people figured out how to use inscriptions to create a simple token standard, BRC20, 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. Since the first quarter of 2023, the mempool of Bitcoin has exploded in growth. The mempool was suddenly clogged by thousands of transactions trying to inscribe their inscriptions onto Satoshis. When bots stifled users' ability to create BRC20, fees briefly dropped again, but the mempool became congested once more. For struggling miners, a congested mempool might be a boon, but those making small transactions find it frustrating. For some, the chain has become 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 a collapse in BTC trading volume after the boom of inscriptions. The trading volume of Bitcoin (, which measures the total amount of successful on-chain BTC transfers ), has fallen to levels not seen since 2020, and it appears that the downward trend will continue.

The increase in demand and costs for inscriptions has caused Bitcoin's FRM to reach its lowest level in a while. FRM, or Fee Ratio Multiplier, 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 started to drive this number down. In 2023, the FRM plummeted from 80x to between 12x and 40x, closer to the levels seen for Bitcoin between 2020 and 2021. A lower FRM level 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 large-scale adoption. Bitcoin seems to be moving beyond the HODL( meme of holding), entering scenarios we frequently use. When inscriptions first entered the market, we predicted the scene you see today. The demand for Bitcoin's block space has created new fees and user sources for the chain. To some extent, thanks to the new fee sources, 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 12 times and 40 times. Bitcoin still faces challenges regarding its security model, as well as 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 promising.

Bitcoin实体

Despite being one of the most decentralized cryptocurrencies, large entities and institutions still have a significant impact on it. To gain a comprehensive understanding of 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 BTC balance on exchanges. The reason is simple: since almost all BTC transactions occur on centralized exchanges, a decrease in BTC on exchanges means less BTC is available for purchase, leading to supply shortages and potentially causing BTC prices 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 BTC on exchanges is at a level we haven't seen since 2018, slightly above 2 million.

There have been rumors that exchanges have been re-collateralizing BTC. After the FTX collapse, BTC may continue to flee from exchanges, as BTC holders are becoming increasingly unwilling to trust centralized entities. The outbreak 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 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. Because of this, miners rely on BTC for operations, which may be a source of selling pressure on BTC. Moreover, miners' behavioral responses also indicate their market positions; if there is a large amount of selling, it may signal a belief in a downward trend. If miners choose to continue holding BTC, it indicates that they believe the price may rise again.

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

Several large mining companies are publicly listed, 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.

Regarding the performance and lifecycle of miners, the most important aspect 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 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 somewhat fearful about the next halving.

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

Unless the price of BTC rises significantly, miners' income will be severely impacted. Bitcoin has not generated enough 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 per day through fees on average, which is 1/9 of what miners lose 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. With the block reward halving around April 2024, the proportion of fees in miner income is greater than before. As a new important 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 the Bitcoin fee structure. On average, inscriptions account for about 13% of Bitcoin fees. During certain frenzied times, inscriptions even...