What is driving Bitcoin's rise this year? Chainalysis finds answers from on-chain data.

Recently, Bitcoin has been hitting new yearly highs day after day. Even though the momentum paused after breaking the $18,000 mark, the overall price level has returned to the bullish market period of December 2017. In response to this, the on-chain analysis firm Chainalysis believes that besides the surge in institutional participants, the distinct use cases of Bitcoin and Ethereum also demonstrate the increasing maturity of the cryptocurrency market.

Speculators Decrease, Hodlers Increase

In a report released by Chainalysis, they classified wallet addresses that have transferred less than 25% of their Bitcoin holdings as long-term holders (low liquidity) and those that have transferred more than 25% as traders (high liquidity) by tracking wallet addresses. The chart below shows the changes from January 2017 to present.

It is evident that trader wallets (yellow) are decreasing while long-term holder wallets (red) continue to reach new highs.

2020: The Year of Institutions Unlike 2017

Chainalysis suggests that the buying demand in 2017 came from retail investors, while in 2020, it is the year institutional hot money began flowing into Bitcoin. For instance, hedge fund manager Paul Tudor Jones likened investing in Bitcoin to buying early Apple or Google stocks.

Additionally, payment company Square, founded by Twitter CEO Jack Dorsey, invested $50 million in Bitcoin, representing 1% of the company's assets. Furthermore, on-chain data shows a 19% increase in large transfers (over one million USD) between exchanges in 2020, indicating institutional and large participants' involvement.

Rise of Fiat Exchanges

In 2017, during the bullish phase, net inflows of Bitcoin into North American exchanges were negative (see chart below), only turning positive when Bitcoin prices reached their peak. However, in this year's bull market, net inflows into North American exchanges are positively correlated with Bitcoin prices, attributed to institutional participants in North America and Europe by Chainalysis.

Compared to 2017, fiat exchanges play a crucial role in this bull market, as per Chainalysis. While 2017 was mainly led by crypto-to-crypto exchanges, the chart below shows a sharp increase in net inflows of Bitcoin into fiat exchanges. This is due to investors seeking to hedge against deteriorating economic trends using Bitcoin.

Bitcoin and Ethereum Showing Different Use Cases

Distinguished by holding period (high/low liquidity), Chainalysis notes that investors increasingly view Bitcoin as a value store for long-term holding (low liquidity) while Ethereum's liquidity is rising, with frequent trading and a growing number of new wallet addresses.

The chart shows that the highest proportion of wallet addresses hold assets for just one month, indicating a structural shift in Ethereum's use cases, largely driven by the DeFi craze. Users continually shift assets in pursuit of high yields, highlighting a clear distinction from Bitcoin. The different applications of the two assets indicate a maturing market.

Overall, investors are more astute compared to 2017, opting for long-term holding of Bitcoin rather than chasing the latest hot assets. Chainalysis emphasizes that while the price ceiling cannot be predicted, there is confidence in more institutional investors entering the crypto market and eventually becoming mainstream.