From Doubt about Bitcoin to Global Recognition: 2023 Bitcoin Ecosystem Development Report

2023 will become one of the most important years in Bitcoin's history. Bitcoin inscriptions have opened up a whole new concept and sub-market for Bitcoin. The Bitcoin Layer 2 networks, sidechains, and scaling solutions have drawn renewed attention from the market. Traditional financial markets are beginning to view BTC as a serious and effective asset class, with over a dozen spot BTC ETF applications submitted in 2023, and several ETFs expected to be approved in early 2024. More importantly, BTC seems to be recovering from the most severe bear market the crypto market has experienced. Bitcoin has withstood the tests of the collapses of Luna, FTX, Voyager, and Celsius, becoming stronger, with increased market attention, ecological vitality, and new technologies. Overall, the current state of Bitcoin is exciting.

This report will focus on several key trends and areas where Bitcoin has performed exceptionally well in 2023. This is not an exhaustive list of Bitcoin developments in 2023, as there are too many things to enumerate. Thousands of people are working towards their own Bitcoin vision. Whether through the Lightning Network, inscription markets, small BTC payments via Bitcoin sidechains, or efforts to bring BTC onto other chains, Bitcoin's development in 2023 has reached unprecedented levels. The stagnation of Bitcoin that we saw in 2021 and 2022 seems to be a thing of the past.

Network

The first thing to pay attention to is the operation of the Bitcoin network. It is understandable if we sometimes forget that Bitcoin is not just the BTC price. Bitcoin is the largest decentralized currency network in the world, so it is crucial to closely monitor the health of the network. To some extent, buying BTC is betting that the Bitcoin network will attract more users and capital. Without growth, Bitcoin will fail. Fortunately, almost all indicators of the Bitcoin network began to improve in 2023.

The performance of computing power in 2023 is surprising. Considering that the price performance of BTC was relatively poor in 2022, we are astonished to find that computing power has continuously set historical highs before 2023. Since the beginning of 2022, the computing power of Bitcoin has doubled, and its hash rate is worth noting for two reasons:

1. It represents the security level of Bitcoin. Generally speaking, the higher the hash rate, the more secure the Bitcoin is ( assuming the hash rate comes from new miners and not just existing miners ).

2. A higher hash rate indicates that miners have confidence in the network. If mining is unprofitable or takes a long time to become profitable, the hash rate is expected to decline.

The number of active BTC addresses significantly decreased from the peak of 1.15 million in 2021. With the BTC price stagnating, over 300,000 users disappeared within a few weeks. Even reaching a new high in November 2021 did not bring back the lost users. The number of active BTC addresses remained stable throughout 2022. However, in 2023, we saw a growing trend in active BTC addresses. Yet, entering 2024, the growth trend seems to have stalled, with active addresses 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, continuing to pay miners for securing the network. Unfortunately, Bitcoin's fee income 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. First, we saw a significant surge in transaction fees at the beginning of this year. After the initial spike, the fee levels stabilized but remained noticeably higher than before.

A significant advancement in addressing the Bitcoin transaction fee challenge is the emergence of inscriptions. We will discuss them in detail later, but fundamentally, inscriptions allow users to store arbitrary data on the Bitcoin network. Just 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 satoshis. Then, people devised a simple token standard called BRC20 using inscriptions, which led to further demand for block space. The demand for storing data on Bitcoin is so high 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 experienced explosive growth. The mempool suddenly became clogged with thousands of transactions trying to inscribe on Satoshis. When bots stifled users' ability to create BRC20, 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 blessing, 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 the collapse of BTC trading volume after the surge 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 the demand and costs for inscriptions has caused Bitcoin's FRM to reach its lowest level in some 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 fluctuated 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 Bitcoin's levels between 2020 and 2021. A lower FRM level is more hopeful, and if you are a long-term believer in Bitcoin, you would want to see this downward trend continue.

The network statistics of Bitcoin paint a vivid picture, mainly dependent on large-scale adoption. Bitcoin seems to be transcending the HODL( meme of holding), entering the 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 sources of transaction fees and users for the chain. To some extent, thanks to the new sources of transaction 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 FRM remains high between 12x and 40x. Bitcoin still faces challenges surrounding its security model and how it will sustain itself when the block rewards end. However, 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 Entity

Despite being one of the most decentralized cryptocurrencies, large entities and institutions still have a significant impact on Bitcoin. 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 exchange BTC balance. The reason is simple: since almost all BTC transactions occur on centralized exchanges, a reduction in the exchange's BTC means a decrease in the available BTC for purchase, leading to a supply shortage and potentially causing the BTC price to rise. At this point, 2023 continues the trend that started during the COVID-19 crash in 2020. That is to say, BTC has been flowing out of exchanges. The BTC on exchanges is at a level we have not seen since 2018, just above 2 million.

There have been rumors that the exchange has re-mortgaged BTC. After the FTX explosion, BTC may continue to flow out of 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. Bitcoin miners are a fundamental component 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. For this reason, miners rely on BTC for their operations, which may be a source of selling pressure on BTC. Moreover, the actions of miners also reflect their market positions; 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 increase.

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 from 2023, they began to accumulate BTC(, although they have been selling ) throughout 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 pay attention to these companies. If mining companies suffer heavy losses, the security of Bitcoin will be affected by shutdowns.

When it comes to the performance and lifecycle of miners, the most important factor is their income. The income of BTC miners consists of two independent sources: block rewards and transaction 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 generally view the reduction of block rewards as a significant positive catalyst. However, miners might feel somewhat apprehensive about the next halving.

Most of the income for BTC miners has historically come from Bitcoin 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. Fees sometimes accounted for less than 1% of miners' income, and 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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