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.

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.

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.

Regulatory - Qualitative Analysis of what’s happening in the space!

• Russia has legalized transacting in bitcoin and cryptocurrency for foreign trade without restrictions but not for transactions within the territory of Russia. This legislation is expected to be passed in January 2023. The move is a response to the decline in imports and import demand since the war in Ukraine began, which has lowered real GDP forecasts for 2023 to -4.0%.

• Brazil has passed a comprehensive regulatory framework for cryptocurrency brokerages and the use of cryptocurrencies, which defines crypto as the digital representation of an asset that can be traded, transferred, and used for payments or investments. Brokerages are required to abide by anti-money laundering best practices and obtain explicit authorization from the federal government before operating in the country.

• US Senators Warren and Marshall have proposed the Digital Asset Anti-Money Laundering Act of 2022, which requires custodial and self-custodial wallet providers, digital asset kiosk operators, and miners to implement know-your-customer procedures due to their proposed designation as "money service businesses." The bill also prohibits financial institutions from interacting with digital asset mixers, privacy coins, and other anonymity-enhancing technologies, as specified by the Treasury Secretary.

• Q4 continued the narrative of cryptocurrencies producing negative environmental impacts, with the European Union announcing a draft proposal to create a grading measure to encourage more environmentally friendly consensus mechanisms like Proof-of-Stake. The EU also plans to produce a report that will evaluate the climate impact of the crypto mining industry by 2025 while encouraging member nations to cease tax breaks for miners. Industry participants have continued to implement sustainable energy, with the Bitcoin Mining Council reporting that members' sustainable power mix stood at 63.8% for the quarter versus the global Bitcoin network's 58.9%.

• To further incentivize renewable energy usage, Sustainable Bitcoin Protocol has created the Sustainable Bitcoin Certificate (SBC), an appreciable digital asset tied to verified clean energy use. SBC seeks to support institutional investors of bitcoin with ESG mandates, incentivize miner adoption of renewable energy, and reduce CO2 emissions.

Disclaimer: As the writer and publisher of this content are the same person, I have authorized myself to create and share it.