About the editor: Spencer Noon is an independent crypto investor. Looking to get in touch? DM him on Telegram or reply to this email and say hi 👋

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This week I’m excited to be publishing our very first Bitcoin Mega Issue. The timing couldn’t be better, with BTC spot ETFs widely expected to finally be approved sometime in the coming months, growing evidence of a sneaky good payments & developer ecosystem, plus other encouraging onchain fundamentals.

Speaking of BTC fundamentals—Alexei Zamyatin, one of our contributors this week, flagged a good metric that I wanted to share: Bitcoin recently hit new ATHs in terms of Processed Daily Transactions (shown in green), and quite notably, this happened during a period of less-than-strong price action (black):

With speculative and reflexive markets like crypto, explosive price action generally begets explosive usage. This should make intuitive sense, since you can’t purchase and assume ownership of a cryptoasset without at least one transaction happening onchain. So you would expect that to be the case in this instance, especially if you look on the chart during previous periods when this metric made new ATHs.

But that is not what happened here, at least to the same extent, and instead appears to be evidence of non-speculative, organic demand for the Bitcoin network. Perhaps this is a leading indicator or price? Unclear, but I’ll definitely be watching metrics like this closely over the coming months as the bear market likely finally comes to an end.

—Spencer Noon 🕛

• The Bitcoin network has proven to be a successful infrastructure for processing global transactions. During the bull market's peak in Nov 2021, there were more than $8.2T worth of BTC transfers. Risk-on assets, including Bitcoin, have suffered tremendously due to the interest rate hikes starting in 2022. The price dropped 57%, and the on-chain volume decreased by 93% compared to ATH. The silver lining is the market sentiment did not impact the growth of monthly active addresses. It increased by 24% compared to Nov 2021 (from 14.4M to 17.9M today). The uptrend started in Jan 2023, which can be attributed to Ordinals Inscription and the recent banking crisis in March.

• When Bitcoin was operational in 2009, the initial block reward was set at 50 BTC per block (~every 10 mins). On 11 May 2020, the 3rd halving occurred, reducing the block reward from 12.5 BTC to 6.25 BTC. The esimated date of the next halving is 11 April 2024, which will reduce block rewards from 6.25 BTC to 3.125.

• The U.S. Government is holding $5B worth of Bitcoin. The U.S. Government has seized at least 215k BTC since 2020 from Silk Road, Bitfinex Hack, and James Zhong, making it one of the largest BTC whales, holding less than 1% of the circulating supply. On March 9, 2023, 9.86k BTC was sent to a Coinbase address.

• Bitcoin Mining Difficulty is a direct indicator of the security and integrity of the Bitcoin Network. The Bitcoin protocol is programmed such that the difficulty level adjusts up/down after every block. High demand leads to high activity which leads to increased difficulty. The higher the difficulty level, the higher the barrier for any potential attacker as it would require tremendous initial capital investment and ongoing electricity costs. This has spiked up exponentially in recent times to the current difficulty of 61T.

• Zooming into 2023: Bitcoin protocol’s difficulty adjusted 23 times this year. 16 adjustments resulted in increased difficulty (red dots), while 7 adjustments resulted in decreased difficulty (gray dots). The prevalence of upward adjustments is indicative of high demand for Bitcoin’s network.

• Bitcoin critics accuse Proof of Work of wasting energy. However, Bitcoin’s energy demand does not increase linearly with network usage or the price of BTC. Since 2018, the energy consumption metric increased from 28.41 to 31.65 (log scale). Technology advancements introduce new efficiencies that enable the production of energy more easily.

• Bitcoin has been grabbing headlines in crypto media as well as traditional finance media in 2023, especially after Blackrock—the traditional finance giant—submitted its application to launch a BTC ETF in June. Looking at Bitcoin wallet distribution of balances between 1 and 50 BTC (slightly less than US$1.5m at today's price): 1-10 BTC range forms an overwhelming majority at 86.6% of wallets (152k total), while the 40-50 BTC range has a 1.27% share of wallets (2.2k total).

• In Sep 2023, Shrimp ($0-1k) activity was 3700x of Whale (>$10M) activity (144.3M vs 38.9k transactions). There is also a strong upward trend of Shrimp transactions since Jun 2023. The Whale activity has been gradually declining from 275k in Jan 2022 to 38.9k today.

• Are the Whales institutional players? There is an interesting pattern: volume repeatedly spikes (2x) and drops in regular intervals, which fit perfectly with the cycle of Weekdays (high activity) and Weekends (low activity), which suggests that many Whales could be institutions.

• Bitcoin sidechains/L2s aim to unlock new use cases for BTC by providing smart contract functionality while trying to inherit some security from the L1. As of today, the TVL across all BTC-focused chains ($99M) has been trailing behind the major DeFi ecosystems of Ethereum ($20B) and ETH L2s ($10B). Main contenders include “legacy” (operational before 2018) Bitcoin sidechains Rootstock ($77.8M), Stacks ($17.5M), Liquid (< $20k), and newer BTC-focused chains like Interlay ($3.7M).

• Of the total 350.26k BTC ($10.38B) used across chains, the majority resides on Ethereum (141k BTC), followed by Tron (113k), BNB (60k), and ETH L2s (20k), the rest (24k) being split across other chains. Thereby, 99.34% of the bridged BTC sits with custodial operators (exception: tBTC v2, iBTC, anetaBTC).

• BTC in DeFi is mainly used as collateral. Taking wBTC on Ethereum for example: out of the 56.75k ($1.6B) wBTC verifiably deployed into DeFi, 93% is deployed across lending and stablecoin protocols (Compound, Aave, Maker), while only 7% is locked in DEX LP positions (Uniswap, Curve, Balancer).

• The Lightning Network is a Bitcoin scaling layer, leveraging 2-way payment channels to enable near-instant BTC transfers. In 2H 2023, Lightning saw a major drawdown in TVL. Last month, capacity bottomed at 4.5k BTC— the lowest level since Aug. 2022— with ~3K channel closes on 9/26 alone. Of these, 2,100 were forced closes, terminated without mutual cooperation between counterparties. Lightning has since seen a rapid recovery of TVL, adding +900 BTC in October, even as total channel count held flat.

• Though capacity recovered, node count took a longer-lasting hit. The number of visible nodes dropped from 18K to just under 17K, while mean channel size grew from 0.064 to 0.08 BTC. This suggests a handful of high-capacity nodes consolidated their capital, cutting ties with inactive counterparties.

• Liquidity providers (i.e. LNBig) are consolidating while on-chain fees are low. “Once LNBig closed those channels, ~1000 nodes disappeared,” says Amboss founder Jesse Shrader. LNBig’s 3 largest nodes— all in the top 10— increased mean channel size +142% this month, with capacity up 3x at 1,003 BTC.

• 💦🔬 Tx-Level Alpha: LNBig’s largest channel is with Binance, boasting 5 BTC in capacity. The channel open transaction was broadcasted just 2 weeks ago, signaling Binance’s ambition to expand their LN footprint alongside peers like Bitfinex & Kraken. Binance’s node has quickly entered the top 10, growing 500% since August to reach 209 BTC in capacity. Lightning will become an increasingly important component of exchange infrastructure for traders seeking to capture arbitrage opportunities with near-instant settlement.

• With the plunge in volumes across the ordinals and broader crypto ecosystem, trading activity for both collectibles and BRC20s has seen a significant dip from their peak in May. However, in recent months, while the trading volume of collectibles continues its downward trajectory, BRC20s have shown resilience. Their trading volume not only appears stable but also consistently outpaces that of collectibles. Daily trade volume for collectibles hover below $100k, whereas brc20s boast a remarkable $200k to $600k daily volume.

• Trading volume on BRC20s favors tokens >3 months old, indicating that newer projects have struggled to capture sustained interest. The 7-month-old sats token recently surged, contributing to over 90% of trade volume. Excluding sats, tokens >5 months old made up 80% of the month's $9M volume.

• For marketplaces, MagicEden remains the top choice for collectibles at 88% 30D market share. In brc20s, Unisat's lead is challenged by OKX. Over the past 30 days, Unisat holds 35% vs. OKX's 65%—a shift from a prior 45% (Unisat) to 51% (OKX).

• After transitioning from Ethereum-based DeFi lending to non-custodial Bitcoin financial tools, Atomic Finance reports an average user investment size of 0.26 BTC. Atomic’s TVL is 71.12 BTC. Atomic’s options strategies currently allow users to earn a 7% annual return.

• A Discreet Log Contract (DLC) is a native smart contract on Bitcoin that allows for any financial contract to be constructed, such as bets, futures, or options contracts. There has been a notable increase in the number of DLCs generated through Atomic.Finance with a record of 2656 DLCs created to date.

• Atomic.Finance is a mobile Bitcoin wallet with 1341 downloads, emphasizing self-sovereignty, transparency, and verifiability. Its core goal is offering non-custodial Bitcoin finance, paired with a user-friendly interface.

• 💦🔬 Tx-Level Alpha: This DLC funding transaction from Atomic Finance's developer account showcases Bitcoin native DeFi on-chain. At a quick glance, this transaction appears to be a dual-funded lightning channel, however in reality it is in fact a DLC, showing how these transactions are built with privacy in mind. It has input sources from both a user and a market maker, the first output is the DLC, and subsequent outputs belong to the market maker and user's change. This shows that Bitcoin native DeFi is not just a distant vision, but possible today.