On-Chain Insights #2: Bitcoin Key Metrics (The World’s First On-Chain Financial Statement)

TL;DR:

• Performance: 2013 was the best-performing year for Bitcoin, with a 5,481% yearly return. 2022 was the 2nd worst-performing year, after the 2018 drawdowns, with a -64.3% yearly performance
• Volatility: Bitcoin's long-term volatility is decreasing over time
• The next halving: Estimated timeline for next Bitcoin Halving is around March-April 2023
• Bitcoin security: The average hash rate dropped almost 50% in 2021 as China banned crypto mining and trading but has ever since recovered and surpassed to new highs. This is a testament to Bitcoin’s strengthened security as a network.
• The mining market: 98%+ of the miners’ revenue comes from block rewards. While block rewards will be halved roughly every 4 years, Ordinals Inscriptions can provide an additional fee revenue to incentivize miners to secure the network
• Bitcoin new use cases with NFTs: Ordinals have reached 470K inscriptions as of 15 March 2023. It has accrued 7% additional fees for miners

Background:

We are thrilled to announce the release of our new real-time dashboard for tracking key metrics related to Bitcoin.

Often dubbed digital gold, Bitcoin may offer a highly viable alternative to gold as an emerging store of value and a hedge against global economic instability. Over the past years, Bitcoin has become a more mature asset, with institutional investors investing or offering access to Bitcoin, such as Tesla, Blackrock, Fidelity, and 21Shares’ exchange-traded products. There is also evidence from the Human Rights Foundation proving that Bitcoin serves as an alternative and censorship-resistant monetary system to protect human rights. The first-ever exchange rate recorded was about $0.0009 per Bitcoin by Martti Malmi, an early Bitcoin developer, who transferred $5.02 for 5,050 BTC via PayPal to seed the bitcoin exchange called New Liberty Standard.

Our new dashboard allows users to view a range of metrics, including the number of transactions per second, the number of active bitcoin addresses, the growth of the bitcoin user base, and the revenue generated by bitcoin miners. Additionally, we provide data on the growing security of the bitcoin network, which is an essential consideration for investors and regulators alike.

As the adoption of bitcoin continues to grow, real-time data is more critical than ever. In addition, technological advancement also plays a massive role in Bitcoin’s adoption with the rise of NTFs (Ordinals) and decentralized applications built on Stacks.

Our dashboard makes it easy to stay on top of the latest trends and developments — and possibly ahead of the curve.

Coverage:

Key Takeaways:

1. Bitcoin’s Long-Term Volatility is Decreasing

Figure 1: Bitcoin 200D Annualized Volatility

Bitcoin is considered to be a volatile asset in its early days. Limited supply, lack of regulatory clarity, and speculative traders are some of the few reasons that contributed to the volatility. Nevertheless, Bitcoin’s long-term volatility has been trending downwards in recent years. Currently, the 200-Day Annualized Volatility is at 42.4%, arguably less volatile than some single tech stocks such as Peloton and Tesla. Furthermore, despite several unfortunate debacles, the peak volatility in 2022 only reached 58% in June, showing that Bitcoin has become more resilient.

2. Estimated timeline for the next Bitcoin Halving: March-April 2023

Figure 2: Bitcoin Block Rewards & Supply

The Bitcoin halving is a programmed event inscribed in the code, where every 210,000 blocks or roughly four years, there is a significant change in Bitcoin’s monetary policy. The halving effectively cuts the new emission of Bitcoin in half to reach the limit of 21 million BTC.

When Bitcoin was first introduced in 2009, the initial block reward was set at 50 BTC per block of transactions. On 11 May 2020, the 3rd halving occurred, reducing the block reward from 12.5 BTC to 6.25 BTC. Our estimation is based on the 90-Day moving average block time or settlement time, giving the forecasted halving date of the 26th of March 2024. Please note that the date is an estimation only, as historical block time does not equal future block time as in the interim, many events can occur, triggering network disruption or slowdowns like the China ban of 2021.

3. The average hash rate dropped almost 50% in 2021 as China banned crypto mining and trading

Figure 3: Bitcoin Block Time & Hash Rate (14D Moving Average)

The targeted settlement time for Bitcoin is approximately 10 minutes. Bitcoin's mining difficulty will be adjusted whenever the block time is above or below the target to maintain a consistent block production rate of around 10 minutes. With higher difficulty, miners need to use more computing power to mine new blocks of transactions. The hash rate measures the amount of computing power being used. The higher the difficulty, the higher the hash rate.

In June 2021, China banned crypto trading and mining. According to the Cambridge Bitcoin Electricity Consumption Index, the hash rate in China decreased from 70.9.1 (EH/s) to 0. Given that China was one of the largest Bitcoin mining countries, the China ban has greatly affected the global Bitcoin hash rate, causing it to drop from 185.2 (EH/s) to 94 (EH/s). The average block time also increased to 14 minutes per block as Chinese miners turned off their supercomputers, leading to longer transaction confirmation time and reduced network efficiency. For the record, the Bitcoin network automatically adjusts to the network level of difficulty for mining every 2,016 blocks or approximately two weeks.

The current hash rate is at an all-time high, 338.6 (EH/s). With the financial challenges and macro environment the miners face, a higher hash rate might imply that the mining industry will require more advanced and efficient machines to mine Bitcoin sustainably over time. As a result, Bitcoin mining might not be as profitable as before, causing many Bitcoin mining firms, such as Core Scientific, Argo Blockchain, and Greenridge, to struggle to survive.

4. 98%+ of the miners’ revenue comes from block rewards

Figure 4: Breakdown of Bitcoin Miners’ Reward

The Block Reward has been the Miners' primary source of revenue. Transaction fees alone only amount to 2% of miners’ total revenue. Even though the halving could decrease Bitcoin's annual inflation rate and maintain the asset's scarcity, miners might be less incentivized to secure the network given the reduced reward, but thankfully the growing use cases on top of Bitcoin with smart contracts built on Stacks and NFTs (Ordinals) pave a new way to increase the network’s transaction fees and as a result, miners’ revenue.

5. Ordinals have reached 470K inscriptions as of 15 March 2023. It has accrued 7% additional fees for miners

Figure 5: Number of Ordinals Inscribed and Fees Incurred by Inscriptions

Ordinals are often referred to as Bitcoin NFTs. Casey Rodarmor launched the ORD software in December 2022. By leveraging the Segwit and Taproot upgrade in 2017 and 2021, respectively, arbitrary data like text, image, and video can be stored in the witness data inside a transaction at a 75% discount compared to a typical financial transaction on the Bitcoin blockchain.

Unlike NFTs on Ethereum, Ordinals are not a token standard like ERC-721. Instead, individual satoshi (1 BTC = 100M satoshi) has been labeled via inscriptions and tracked across Bitcoin’s supply. Thus, the Ordinals can be stored on-chain, while most Ethereum NFTs are stored off-chain, mainly on IPFS, a file-sharing peer-to-peer network.

The Ordinals have put Bitcoin under the spotlight once again in the community. As of 15 March, Ordinals have reached 470K cumulative inscriptions. Ethereum NFT giant Yuga Labs also launched a collection, TwelveFold, on Bitcoin. The collection has been an enormous success, raising over $16.49M, with an average size of $57K per NFT (~2.55 BTC or 36.5 ETH).

With the introduction of Ordinals, Bitcoin has an additional use case in culture, art, or data storage. The new feature can also bring in additional fees for miners. As of 15 March 2023, Ordinals have brought in 7% additional fees. In other words, it spiked the transaction fees by 7% (Block Rewards not Included). Suppose Ordinals can gain broader adoption in the long run, in that case, it could create a sustainable demand for Bitcoin block space and provide Bitcoin miners with an additional revenue stream, and be less reliant on and incentivized by block rewards.

While Ordinals certainly have elevated usage of the Bitcoin network, it is also essential to acknowledge the concerns surrounding the technology. For example, most Ethereum NFTs are traded on NFT marketplaces like Opensea and Blur. However, since Bitcoin does not have smart contract capabilities, most Ordinals are traded via OTC using Discord. With the rise of Stacks bringing in smart contracts built on Bitcoin, Ordinals can be traded on NFT marketplaces such as Gamma.io. Another concern is the increasing hardware requirement to run a Bitcoin full node, as Ordinals consume a larger block space. Yet, future developments like scaling solutions and better bandwidth can mitigate the tech constraints above.

Closing Thought:

Bitcoin is the cryptoasset with the most extended history. While it will continue to serve as a peer-to-peer public ledger, more use cases could be explored and experimented with in the future, especially with the help of scaling solutions like Stacks and the Lightning Network.

Ordinals have led to a vast sensation of the Bitcoin network, yet, continual success is not guaranteed. To closely monitor Bitcoin and Ordinals' future development, check out our real-time dashboard and analyse the on-chain data with us!

Link to the Bitcoin Key Metrics: https://dune.com/21shares_research/bitcoin-key-metrics

Link to all of our on-chain dashboards: https://dune.com/21shares_research

Disclaimer

This document is not an offer to sell or a solicitation of an offer to buy or subscribe for securities of 21Shares AG. Neither this document nor anything contained herein shall form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction. This document and the information contained herein are not for distribution in or into (directly or indirectly) the United States, Canada, Australia or Japan or any other jurisdiction in which the distribution or release would be unlawful.This document does not constitute an offer of securities for sale in or into the United States, Canada, Australia or Japan. The securities of 21Shares AG to which these materials relate have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. There will not be a public offering of securities in the United States.This document is only being distributed to and is only directed at: (i) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (“FSMA”) (Financial Promotion) Order 2005 (the “Order”); or (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”); or (iii) any other persons to whom this document can be lawfully distributed in circumstances where section 21(1) of the FSMA does not apply. The securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.In any EEA Member State (other than the Austria, Belgium, Croatia, Denmark, Finland, France, Germany, Great Britain, Hungary, Ireland, Italy, Liechtenstein, Luxembourg, Malta, The Netherlands, Norway, Poland, Romania, Slovakia, Spain and Sweden) that has implemented the Prospectus Regulation (EU) 2017/1129, together with any applicable implementing measures in any Member State, the “Prospectus Regulation”) this communication is only addressed to and is only directed at qualified investors in that Member State within the meaning of the Prospectus Regulation.Exclusively for potential investors in Austria, Belgium, Croatia, Denmark, Finland, France, Germany, Great Britain, Hungary, Ireland, Italy, Liechtenstein, Luxembourg, Malta, The Netherlands, Norway, Poland, Romania, Slovakia, Spain and Sweden the 2021 Base Prospectus (EU) is made available on the Issuer’s website under www.21Shares.com.The approval of the 2021 Base Prospectus (EU) should not be understood as an endorsement by the SFSA of the securities offered or admitted to trading on a regulated market. Eligible potential investors should read the 2021 Base Prospectus (EU) and the relevant Final Terms before making an investment decision in order to understand the potential risks associated with the decision to invest in the securities. You are about to purchase a product that is not simple and may be difficult to understand.This document constitutes advertisement within the meaning of the Swiss Financial Services Act (the “FinSA”) and not a prospectus. In accordance with article 109 of the Swiss Financial Services Ordinance, the Base Prospectus dated 12 November 2021, as supplemented from time to time and the final terms for any product issued have been prepared in compliance with articles 652a and 1156 of the Swiss Code of Obligations, as such articles were in effect immediately prior to the entry into effect of the FinSA, and the Listing Rules of the SIX Swiss Exchange in their version in force as of January 1, 2020. Consequently, the Prospectus has not been and will not be reviewed or approved by a Swiss review body pursuant to article 51 of the FinSA, and does not comply with the disclosure requirements applicable to a prospectus approved by such a review body under the FinSA.