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Key Takeaways:

-        BTC showed poor quarter over quarter price performance at -11.5%, but is still outperforming most asset classes year to date

-        US bid that drove Bitcoin up in H1 has fully diminished at the time of writing

-        Volume, liquidity, volatility, and search trends all continue to decline

-        Grayscale’s discount to NAV has closed from -48% to -16% throughout the year

-        Percentage of Bitcoin held by long term holders has reached an all time high of over 76%

-        Bitcoin native valuation still shows BTC is in lower bounds of value

-        Active addresses slightly up while transfer volume (entity-adjusted) continues to decline

Following a strong H1 price performance for Bitcoin, Q3 showed to be lackluster for BTC, down 11.5% quarter over quarter.

However, in this great chart from NYDIG, we can see that throughout 2023 YTD Bitcoin has quietly outperformed most major asset classes including large cap growth, mid and small cap growth, US and European stocks, commodities, treasuries, gold, cash, emerging markets, as well as REITs.

One of the biggest drivers of Bitcoin’s performance in the first half of the year was the Bitcoin ETF applications that were filed by several well-known traditional financial institutions including Blackrock and Fidelity. These filings were followed with a strong bid for BTC during US trading hours. As shown below, this US trading hour premium that was quite noticeable in March, has since fully diminished.

This is also reflected by Bitcoin’s CME futures open interest declining, which is primarily traded by traditional hedge funds, family offices, etc. Open interest refers to the number of futures contracts outstanding.

Other measures of excitement in the Bitcoin market have also shown a decline, including Bitcoin’s trading volume across spot and futures, Bitcoin’s 3-month futures basis (difference between spot and 3-month futures contracts), and can even be reflected by measures as basic as google search trends. It is safe to say that the Bitcoin market is in a period of deep apathy.

One positive trend that we’ve seen throughout the year is the GBTC discount to net asset value closing in, reflecting increased sentiment around Grayscale’s likelihood of being able to convert their current closed end trust into a spot Bitcoin ETF. Throughout 2023 the GBTC discount has closed in from -48% to just -16%.

In terms of valuation, one of the metrics that we follow most closely is the MVRV ratio. This compares Bitcoin’s current marginal trading price to its realized price, which is the cost basis of the entire network based on on-chain data. The idea of the methodology is that whenever MVRV is high, market participants are sitting with a large amount of unrealized profit and are incentivized to realize some of that profit, while when going negative means that the market in aggregate is underwater by definition. While the market is no longer in deep undervalued territory as it was at the end of last year, it is still far from overheated levels reached during the peak of 2017 and 2021.      

Whether Bitcoin’s cyclicality is driven by halvings, macro forces, general behavior dynamics, or a combination of all three is up for debate; but when comparing this current cycle’s performance from its lows relative to Bitcoin’s three prior cycles, things appear to be playing out quite similarly from a time perspective.  

Meanwhile, flipping over to network activity, we can see that the percentage of Bitcoin’s supply held by long term holders has reached an all time high at over 76%. This means that more than 3 out of every 4 BTC it held by long term holders. For reference, long term holders are defined as on-chain entities that have held their Bitcoin for more than 155 days, a threshold where on-chain data scientists have found the likelihood of coins being spent drops off the most significantly. This reflects the deep belief of Bitcoin’s core holder base despite crypto market wide contagion and macro uncertainty, as well as the rise of custody products.                               

When plotting out the amount of Bitcoin supply held by long term holders relative to short term holders, we can see the impulses that shape Bitcoin’s multi-year market cycles, as savvy investors accumulate throughout the bear market and distribute into the bull.

Another positive trend underneath the hood is the amount of Bitcoin held by on-chain entities with less than 10 Bitcoin, which not only trends up and to the right throughout Bitcoin’s entire history, has seen a large rise over the trailing year, with this quarter being no different. This is a positive trend that we’d like to see continue for the sake of Bitcoin’s supply distribution.

This quarter Bitcoin’s block height breached 800,000 -- a milestone reflecting that the decentralized network has continued to function as intended for well over a decade.

Bitcoin's hash rate has also set new all time highs this quarter, but with the halving on the horizon, increased competition may spell troubles for miners without competitive energy costs.

Active addresses saw a jump from 950,000 to just over 1,000,000 throughout Q3.

Meanwhile, the 7 day moving average of Glassnode’s entity-adjusted transfer volume continues to slump, down to just over $3.1 billion settled by the Bitcoin network a day.

Although still down from its July highs, Bitcoin’s public lightning network capacity jumped in Bitcoin terms throughout the last few weeks, currently sitting at 5,200 BTC. It is worth noting that this is just public lightning network capacity, and true figures may look different.

The USD denominated version of lightning network capacity offers a less favorable look, down to $140 million from its late 2021 peak of $215 million.

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Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.

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