Cryptocurrency markets have experienced their first major decline this year amid tough regulatory moves in the United States and a crackdown by the Securities and Exchange Commission. At the same time, the emergence of Ordinals that allow the creation of NFTs on the Bitcoin blockchain is creating new and unexpected demand for the block space.
The digital asset market experienced its first significant drop since the January rally, with BTC falling from a weekly high of $23,300 to a low of $21,500. This was accompanied by important regulatory news from the United States, such as the SEC's penalty against Kraken's staking service, the SEC's legal action against Paxos for issuing the stablecoin BUSD, and multiple lawsuits against crypto banking partners and payment service providers.
Recent weeks have also seen the unexpected birth of NFTs stored on the Bitcoin network in the form of ordinals and inscriptions, with over 69,000 inscriptions created. As a result, Bitcoin network activity has increased significantly and fee pressure has increased.
In this week’s edition, we’ll explore the Bitcoin network from two main perspectives:
The high nominal returns to new buyers are indicative of investor behavior during pullbacks from local tops.
The emergence of the Ordinals protocol and its impact on on-chain activity and fee pressure.
Decisive price range
As the Bitcoin spot price exceeds the actual price, the market enters a macro transition period, which is generally limited by two pricing models:
The lower edge of this area is the actual price ($19,800), which corresponds to the average on-chain purchase price in the market.
The upper edge is determined by the realized price to activity ratio ($32,700), a variation of the realized price indicator that reflects the “forecasted fair value” calculated based on the level of HODLing activity.
Comparing previous periods within the above range, we see similarities between the current market and the 2015-2016 and 2019 re-accumulation periods.
The rally paused at a local high of $23,600. We can examine investor behavior at this point using the Accumulation Trend Score indicator, which reflects the change in the total balance of active investors over the past 30 days. Darker colors represent larger entities (such as whales and institutional wallets), and a value of 1 means that a large portion of investors have accumulated more Bitcoin in their wallets.
Compared to previous bear markets, similar rallies during the bottoming phase triggered distribution activity, mainly from entities that accumulated BTC at low prices. The recent rally was no exception, with the index falling below 0.25.
Therefore, the sustainability of the rebound will depend in part on whether these larger entities continue to accumulate, causing the Accumulation Trend Score to rise back toward 1.0.
Price fluctuates between 2 cost bases
Generally speaking, after the Bitcoin market pulls back from an extreme (such as a macro top or bottom), the recent behavior of active investors tends to be the dominant factor. The chart below shows that the price is stagnant around the bid of old supply (>6 months), and the actual price and new supply (<6 months) are both staying below $19,800-$20,000.
Looking at recent buyers, you can estimate their average nominal return multiple using the Short-Term Holder MVRV indicator. This index measures the ratio of spot price to the on-chain cost basis. Using the weekly average of this indicator, we have the following observations:
A breakout above 1 results in nominal profits for new investors and often indicates a market transition.
The macro tops (and bottoms) remain very similar, with +40% average nominal returns representing a top and -40% representing a bottom.
As investors react to BTC returning to breakeven, STH-MVRV returns to a central value of 1.0, often signaling local tops (and bottoms).
The probability of a short-term correction tends to increase when short-term holders gain +20% (STH-MVRV = 1.2) or lose -20% (STH-MVRV = 0.8).
The recent rejection at $23,600 resonates with this structure as the STH-MVRV reached a value of 1.2. Considering the third argument, in the event of a further correction, a move back to the $19,800 level would represent an STH-MVRV value of 1.0 and be consistent with a return to the cost basis and price reality of a new group of buyers.
Momentum on the positive chain
The recent arrival of Ordinals has led to a significant increase in on-chain activity metrics, but has had a relatively small impact on total transition supply.
The assets transferred daily can be tracked through the 1-day band of the Realized Cap HOLD Waves indicator. This indicator captures the matching ratio of USD assets changing hands daily.
When we observe significant increases from 1.5% to 2.5%, we can identify periods of high buying demand and large amounts of assets changing hands. The most recent recovery shows an increase in revenue from 0.75% to 1.0%. This suggests that despite the increase in network activity, the rate of change of BTC volume remains low.
New entrants into the fee market
The result of this activity is that there are new buyers for Bitcoin network space, creating upward pressure on the free market. Fee market analysis is an effective measure of higher demand for block space and tends to occur during periods when overall demand may be increasing.
A look at the average monthly fee income of miners clearly shows that this metric has not exceeded the glorious market fee (2.5%) for a long time.
The influence of smaller entities often plays a significant role in determining the sustainability of market transformations. Here we can use another tool to determine the impact these investors have on the fee market by looking at the weekly average transaction fees returned in USD. This is a metric that represents the smaller and often regulated transaction fees of retail investors.
Looking back at the history of this metric shows that competition among retail investors for confirmed transactions to enter the next block has not recovered since the market crash following the 2021 ATH.
The emergence of Ordinals protocol
A new use case for NFT writing/carving on the BTC blockchain has generated a lot of discussion in the community since its launch in late January 2023. As Casey Rodarmor, the creator of the Ordinals protocol, describes in his blog, Ordinals utilizes the Taproot soft fork and satoshi numbers (serialization) to write data into the witness portion of a Bitcoin transaction.
The effectiveness of this new innovation is shown by Taproot’s adoption and usage petition rates surging to all-time highs, such as 9.4% and 4.2% (join our research. Learn more).
Ordinals also had a significant impact on average block size, with the top edge of average block size increasing from a stable 1.5-2.0 MB to 3.0-3.5 MB in the last week.
These larger blocks have sparked a healthy discussion about the long-term impact that Ordinals could have on Bitcoin block size, head ban node sync times, mempool congestion, and long-term fee market conditions. So far, the role of Ordinals has been to set a new upper limit transaction fee required to be included in a block. A large number of low-fee paying transactions (0 to 1 sat/vbyte) can be seen leading to the mempool. This is different from the post-FTX crisis, where the mempool was fully replenished due to extremely urgent and high-fee paying transactions.
in conclusion
The Bitcoin network and asset have experienced many new events and changes in its turbulent 14-year history. The arrival of Ordinals and Inscriptions was surprising, and it may represent an unusual increase in demand for block space, although this may not be a diversion from the classic BTC among investors.
This is a new and unique moment in Bitcoin’s history, where a new twist is generating network activity without BTC being converted to monetary purposes. This describes the increased pressure on the fee market from the growth of the user base and new use cases outside of typical remittances and investments. Ordinals is a new area that we will be diving into in the coming weeks to see how it impacts and manifests itself in on-chain networks and investor behavior.
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