Key Points:
- The market price of BTC fell significantly below the realized price in November, indicating market distress and potentially signaling a major market bottom.
- The Reserve Risk indicator hit an all-time low during Q4, suggesting that bitcoin may be undervalued and approaching a major cycle bottom.
- Despite extreme market volatility, HODLer conviction continues to grow, with a record-high percentage of circulating coins not moving on-chain for more than 6 months.
- The FTX crisis played a significant role in on-chain activity during Q4, with a boost in the number of active addresses and a record-breaking volume of BTC flowing out of centralized exchanges and into self-custody wallets.
What is Bitcoin?
Bitcoin is a decentralized digital currency that operates autonomously, and is secured through Proof-of-Work consensus mechanism which requires miners to solve mathematical puzzles in order to add a new block to the blockchain and receive newly minted bitcoins as a reward.
To put in simple perspective,
Bitcoin is like a special kind of money that lives only on the internet, and it's not controlled by anyone.
To keep it safe, people who want to join the system have to do some special work by solving hard math problems. When they solve a problem, they get a reward in the form of new bitcoins.
When people use Bitcoin to buy things or send money to each other, they make a note of it on a big list called the blockchain. The blockchain keeps track of all the transactions that happen with Bitcoin, and everyone can see it.
Imagine you and your friends have a collection of stickers, and you want to trade them with each other. However, you don't want to rely on a central authority to keep track of who has what stickers, as you don't want them to control the trading or potentially take away your stickers.
So, you decide to use a digital ledger, like a notebook, that each of you can access and update.
In this digital notebook, you record each transaction, listing who traded what stickers with whom.
This digital notebook is similar to the blockchain, where each transaction is recorded in a decentralized and transparent way.
To secure this notebook, you and your friends have to solve a puzzle or a math problem before you can add a new transaction.
This is similar to the Proof-of-Work consensus mechanism in Bitcoin, where miners have to solve mathematical puzzles before they can add a new block to the blockchain and receive newly minted bitcoins as a reward.
So now that you get the idea, let's get into much deeper than basic Bitcoin.
As stated on the published Bitcoin Whitepaper by Satoshi Nakamoto, indicates an abstract that proposes a peer-to-peer electronic cash system for online payments to be sent directly from one party to another without the need for a trusted third party to prevent double-spending.
Further descriptions can be found here:
- An ongoing chain of hash-based proof-of-work is used to timestamp transactions and prevent double-spending.
- The longest chain serves as proof of the sequence of events and the largest pool of CPU power.
- The system relies on a majority of non-cooperating nodes to generate the longest chain, making it secure against attacks by malicious actors.
- The network is highly flexible, with nodes able to leave and rejoin at will, and no need for a trusted third party to manage the transactions.
- This system has significant potential to increase security and reduce costs in online transactions.
- The system has paved the way for the development of cryptocurrencies and blockchain technology.
If you want to learn more about the basics of Bitcoin, there are a plethora of resources available online that can guide you through the process of buying and trading it - but, we suggest starting on the whitepaper [1].
The Good, the Bad, and the Numbers: Q4 Performance Analysis
Bitcoin faced a challenging year in 2022 due to external factors such as the unfavorable macroeconomic environment and the Terra/LUNA crisis.
In the fourth quarter, the sudden collapse of FTX disrupted Bitcoin's stability at $20,000 and led to market volatility, causing a 25% drop in its price, bankruptcies of centralized companies, and a 15% QoQ decrease, with Bitcoin ending the quarter at $16,533.
Bitcoin had a tough year in 2022, with its annual performance down 64%, and its price performance following a recurring pattern of a sharp increase followed by a rapid decline every four years, centered around the bitcoin halving event, which has occurred in 2014, 2018, and 2022.
Bitcoin's price dropped below the previous cycle high from 2017, deviating from the previous pattern.
Bitcoin was the worst-performing asset class in the quarter due to panic selling and contagion following the FTX collapse, although the event was not linked to the network's performance or integrity.
Bitcoin's realized volatility decreased during the quarter, resulting in fewer liquidations, except for the short liquidations on October 26 and 27, which were due to a short squeeze caused by spot prices holding above $20,000, and the second half of the quarter saw a weakening bearish trend, with futures open interest near annual lows.
The FTX collapse caused a significant shift of Bitcoin from centralized exchanges to self-custody wallets, resulting in a decrease of Bitcoin held on exchanges, despite the increasing supply of Bitcoin.
In Q4, the growth of funded addresses for Bitcoin slowed down with only a 1% increase from the previous quarter, while the daily number of active addresses showed a trend reversal with a 2% increase after three quarters of decline, partially attributed to the FTX crisis prompting a shift from centralized exchanges to self-custody wallets.
Bitcoin transaction volume experienced a significant surge in Q4, reaching a new high for the year with over 23.3 million transactions recorded. On average, there were 259,000 daily transactions, which is a 3% increase compared to the previous quarter. The increase in the number of transactions can be largely attributed to the FTX crisis.
Despite the surge in transaction volume, the average daily amount of transaction fees generated by the Bitcoin network dropped by 3% to $317,000. This may be attributed to the use of the Lightning Network for smaller transactions, which have lower fees compared to on-chain transactions.
The total number of Bitcoin-funded addresses grew by a mere 1% from the previous quarter, reaching 43.3 million in Q4.
However, the daily number of active addresses showed a reversal trend, increasing by 2% after three consecutive quarters of decline. This increase in on-chain activity can be partially attributed to the FTX crisis, which led to many holders moving their BTC from centralized exchanges to self-custody wallets.
Furthermore, Bitcoin's realized volatility declined in Q4, following a temporary spike around the time of the FTX bankruptcy.
This decline in realized volatility led to fewer liquidations in the quarter, with the exception of short liquidations on October 26 and 27, which were due to spot prices breaking and holding above $20,000 and initiating a short squeeze.
Overall, while the FTX crisis had a significant impact on Bitcoin's performance in Q4, the Bitcoin network remains robust, with increasing on-chain activity despite a slowdown in growth in the number of funded addresses [2].
Low Reserve Risk, High HODLer Conviction: What Does It Mean for Bitcoin's Future?
The fourth quarter of 2022 was a period of significant market distress for bitcoin, with a drop in price causing the market price to fall significantly below the realized price.
This signaled market distress and historically, such occurrences have coincided with major market bottoms.
However, despite the extreme market volatility experienced this quarter and the price of bitcoin falling below the previous cycle high, HODLer conviction continues to grow.
The percentage of circulating coins that haven’t moved on-chain for more than 6 months reached a record high of 78% at the end of the quarter, indicating a long-term investment horizon and confidence in the asset.
The Reserve Risk indicator hit an all-time low during this period, suggesting that bitcoin is undervalued and might be approaching a major cycle bottom.
A low Reserve Risk means that there is high confidence among HODLers during a period of low market price, creating a favorable risk-reward situation for investors.
Furthermore, the Puell Multiple remained near historic lows during the second half of 2022, accompanied by capitulation and bankruptcies amongst miners.
However, this period of low Puell Multiples can be beneficial for the market, as it implies that weaker, unsustainable miners are removed from the market.
A high Puell Multiple indicates miner profitability is above average, while a low Puell Multiple signals a difficult time for miners in terms of profitability.
Overall, these indicators suggest that the market is approaching a major cycle bottom, and that despite the market volatility, long-term investors remain confident in bitcoin as an asset class.
Key Events in Q4 of 2022
October
- Plan B Foundation onboarded multiple businesses in Lugano, SZ to accept BTC.
- Visa launched BTC debit cards in 40 countries.
- Google partnered with Coinbase to accept BTC and crypto for cloud services.
- BNY Mellon offered BTC custody services.
- 21Shares launched the Middle East’s first spot BTC ETP.
- Kazakhstan established a legal framework for BTC and crypto.
- Hong Kong announced the legalization of retail BTC trading.
November
- Fidelity debuted retail BTC trading accounts.
- The U.S. Department of Justice seized over $3.36 billion in BTC tied to Silk Road.
December
- Microstrategy announced the launch of BTC lighting solutions in 2023.
- Microstrategy added 2,500 BTC to holdings despite tax-loss harvesting.
- Hong Kong stock exchange's first BTC futures ETF received $53 million in initial investment.
- Japan's largest power company began mining bitcoin.