The first half of 2022 was the worst ever for the crypto market. This is mainly because of events that occurred during the Q2, such as Terra’s collapse and Three Arrows Capital’s insolvency. A recent report by one of the most popular crypto websites has examined exactly what happened during this chaotic second quarter and how it could affect cryptocurrency in the remaining half of this year. Today I’m going to give you a bit of background on this report, summarize what it says in simple terms, and tell you what it could mean for the crypto trading market going forward.
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About the Report
The report in question was created by popular cryptocurrency price tracking website Coingecko. I’m sure you’re all familiar with it. The report begins with a note from Coingecko’s founders where they talk about how crypto lost more than half of its market cap during Q2 and how this was due to a combination of macro factors and Terra’s collapse. Naturally, the founders also mentioned Three Arrows Capital and how its insolvency took down crypto platforms and copy trading bots that were exposed to it, like Voyager Digital, and also noted the gradual decline in the NFT market.
On a more positive note, the founders point out that many crypto ecosystems continue to thrive despite the bear market, that most of the leverage has been flushed out by the recent crashes, and that many bitcoin copy trading companies and projects continue to operate as usual, including Coingecko.
Crypto Market Overview
The first part of the report provides an overview of the crypto market. As mentioned in the report intro, crypto lost nearly 56% of its market cap during the second quarter of this year and is, or rather was, 70% down from its November highs.
What’s interesting is that trading volume during the second quarter was essentially the same as the first quarter, suggesting the same pool of traders and investors has stuck around since that time. The authors then turn to the market dominance of the top 30 cryptocurrencies. For reference, market dominance means how much of the total market cap is coming from a single cryptocurrency. As you can see, BTC’s dominance remained the same while ETH fell significantly in June.
I suspect this has to do with the news that Ethereum developers had delayed Ethereum’s difficulty bomb. For context, the difficulty bomb is meant to motivate Ethereum miners to transition from proof of work to proof of stake. As such, a delay in the difficulty bomb was interpreted by ETH investors as a sign that the merge wasn’t happening anytime soon, but as we now know, it looks like the merge will occur towards the end of September.
Another interesting thing the authors found was that Bitfinex’s exchange token, LEO, was the only cryptocurrency that didn’t end up in the red during the second quarter of this year. This is only because exchanges will use trading fees to buy back and burn their native tokens, causing their prices to go up artificially. This practice is starting to attract the scrutiny of regulators. Let’s just say that there’s no shortage of such scrutiny in Bitfinex’s case.
When it comes to the market cap of stable coins, a total of nearly $39 billion was lost as a result of the Terra’s collapse. Tethers USDT lost 20% of their market cap, with circles USDC picking up the majority of the slack. The authors note that this is evidence that investors were cashing out of crypto completely during Q2. Not surprisingly, the authors found that the top 30 cryptocurrencies by market cap are strongly correlated to the S&P 500 stock index, specifically 0.92 out of a max correlation score of 1. This suggests that stocks were the primary drivers of crypto prices during Q2 2018.
The authors provide an awesome timeline of all the significant events that occurred in crypto during the second quarter of this year, and they include just about everything you’d expect: STEPN banned in China, Harmony Bridge hack, Greyscale’s ETF application rejection by the SEC.
Bitcoin
In the second part of the report, which provides an analysis of bitcoin, it starts with this scary chart that shows how Bitcoin briefly fell below its previous bull market top of $20k in June. Bitcoin could fall as low as $10k later this year, and the bear flag forming on its monthly chart suggests this could happen more.
Meanwhile, Bitcoin’s hash rate only continues to climb and even managed to set an all-time high in June. For those who don’t know, Bitcoin’s hashrate is a measure of how much computing power is connected to the Bitcoin blockchain.
When comparing Bitcoin to other assets, the authors found that the only ones that saw any gains were oil and the US dollar, both of which rose by 7% during Q2. This might have something to do with the fact that the US dollar is basically backed by oil, but let’s not go there.
Ethereum
The third part of the report provides an analysis of ethereum, and it starts with an even scarier chart that shows how ethereum fell by nearly 70% during Q2 2018. The authors attribute this crash to Lido Finance’s stETH token, notably its use in terror’s now defunct Anchor protocol, its use by ailing crypto platforms like Celsius, and its exposure to failed hedge funds like Three Arrows Capital.
Next, the authors provide an updated timeline for Ethereum’s transition from proof-of-work to proof-of-stake, which is already a bit out of date but puts the merge in Q3 of this year, which is technically correct.
What’s interesting is that the authors found that the amount of ETH being staked on ethereum’s Beacon chain seems to be peaking at around 11% of ETH’s total supply. The authors also point out that Lido Finance is still the largest single ETH stakeholder, with over 32%.
The authors show just how much Lido’s stETH token deviated from its peg relative to ETH, but it’s important to note that this peg was quickly restored after ethereum developers confirmed a tentative date for the merge.
Terra
The fourth part of the report provides some perspective on Terra’s collapse. Starting with an image I’m sure most of you are familiar with, that’s UST’s disastrous de-pegging from one dollar to zero.
I couldn’t help but notice that the authors state that “crypto’s darling stable coin jumped off a cliff with the first four letters of “JUMPed” being capitalized, which is a bit odd. This is a subtle reference to Jump Crypto, a crypto trading and VCF firm that was heavily involved in Terra’s ecosystem and is rumored to have lost lots of money defending UST’s peg.
In any case, the next image is another example of UST’s peg. I’m sure most of you are familiar with Luna’s painful implosion from $120 down to zero. The authors also note that Luna’s supply increased by a whopping 1.9 million% before Terra’s validators turned off the mint and burn mechanism.
Next, the authors provide a detailed timeline of Terra’s collapse, and what’s interesting is that they don’t mention the alleged attack on the FPO on curve finance that occurred shortly after the terror team withdrew liquidity, the exact timing of which was not publicly known. Investigations by on-chain analytics platforms such as Chainalysis suggest that this alleged attack is what caused UST’s initial de-pegging, something which subsequent investigations found was exacerbated by Celsius withdrawing massive amounts of UST from anchor protocol out of caution. The authors of this crypto report seemed to blame Terra’s collapse on the broader crypto market conditions, which certainly played a role as well.
On the next page, the authors provide what is probably the best infographic I’ve seen about the second-order effects of Terra’s collapse. On the left, you can see all of the institutions that have invested in Terra, including Jump Crypto. On the top left you have the crypto projects and platforms that were exposed to terror, such as Celsius. And on the bottom left, you have all the different stable coins that were depicted.
These also included Lido Finance’s stETH token, but I would argue that it’s not really comparable to these stable coins as they were not meant to be pegged. It’s tokenized stETH, which is not 100 equivalent to ETH.
On the right side, there is Three Arrows Capital, which was, of course, exposed to Terra. It is a truly amazing image. On the top right, you have all the different crypto projects and platforms that were exposed to 3AC, and on the bottom right, you have all the crypto companies with exposure to 3AC.
The authors then provide more details about how Celsius, BlockFi and Voyager Digital were affected by the Terra’s collapse and 3AC’s insolvency.
DeFi
The fifth part of the report provides an analysis of the decentralized finance ecosystem and it starts with yet another unsurprising chart, which shows how the total DeFi market cap fell by nearly 75% during the second quarter of this year, a crash caused mostly by Terra’s collapse.
What’s annoying is that the authors don’t actually note which cryptocurrencies they count as being part of their DeFi market cap measure, which is something I’d really like to know as a crypto holder and investor. The silver lining to this sad statistic is that the number of DeFi users only declined by about a third during Q2 this year. The authors note that the number of daily active DeFi users is currently around 30k, but I reckon the monthly active DeFi user count would provide a more accurate picture of engagement.
What’s fascinating is that the authors found that users flocked to decentralized exchanges when centralized exchanges were having issues with LUNA and UST, and users flocked to DeFi protocols after Celsius paused withdrawals.
Consistent with the decline of crypto’s market cap, the total value locked in DeFi protocols across major smart contract cryptocurrencies fell by just over 55% during the second quarter. This makes me wonder how much of this TVL was just the value of the volatile coins and tokens being used in these protocols.
Next, the authors reveal the different DeFi categories, their share of the DeFi market, and how much they dropped during Q2. Unfortunately, the authors don’t provide specifics about individual DeFi projects. The main takeaway just seems to be that DeXes are the biggest slice of the DeFi pie at 44%.
NFTs
Now the sixth part of the report provides an analysis of the NFT ecosystem, and it starts by shedding the spotlight on the massive decline in NFT trading volume since the start of the year. The authors note that Solana and BNB are becoming popular non-chains because of STEPN. They throw shade at RONIN Axie Infinity’s side chain by saying that the bridge hack and a collapse in player revenue are the final nails in its coffin. A pretty bold claim if you ask me.
As far as NFT marketplaces go, the authors found that even though OpenSea is still the biggest NFT marketplace by trading volume, its dominance is on the decline due to new competitors like Magic Eden, an NFT marketplace on Solana. If you ask me, OpenSea’s decline is less due to competition and more due to the controversial things the platform has done, such as freezing NFTs and blocking users in sanctioned countries.
In terms of NFT trends, the authors believe that NFT investors are moving away from looking to earn and silly NFTs with no utility and are moving towards NFT profile pictures and NFTs that are actual art like those found on art blocks. You heard it here first, folks.
The authors finished this part of the report by focusing on Solana’s NFT ecosystem, which is as interesting as it is unfortunate, as it would have been great to also see what other NFT ecosystems are looking like on Ethereum competitors like Cardano, Avalanche and Algorand.
Cryptocurrency Exchanges
The seventh part of the report provides an analysis of cryptocurrency exchanges. It starts with a surprising statistic, and that’s that trading volumes on centralized and decentralized exchanges only fell by 11% during Q2.
The authors note that centralized exchanges are starting to increase their dominance despite all the risks associated with centralized crypto platforms these days. This could be because traders and investors are using centralized exchanges to cash out. Alternatively, this increase in dominance could be coming from the fact that some exchanges, like Binance, recently slashed trading fees, which would explain why Binance’s dominance increased significantly during Q2. Ftx’s dominance also doubled during this period, but the authors note that no one can compete with Binance as they have grown their market share to capture almost 50% of the entire market, which is another bold claim, but probably nothing more than awkward wording. By contrast, OKX and Crypto.com’s dominance decreased by 50% each. I suspect that’s because of what’s been going on with CRO.
In any case, the majority of the decline in exchange trading volume was caused by decentralized exchanges, whose trading volumes fell by nearly 40% during Q2. According to the authors, Uniswap dominates the DEX market, accounting for 60% of total DEX trading volume. They also note that Curve Finance trading volume increased significantly during Q2, probably because of the flight to safety, aka stable coins. If you didn’t know, Curve Finance is a stable coin DEX if you didn’t know.
Next, the authors examine derivatives such as futures trading, which involves speculating on the future price of a particular coin or token, often with leverage, aka debt. As with regular trading volume, derivative trading volume didn’t decline by all that much during Q2. It’s a similar story for open interest, aka derivatives trades waiting to be filled up and coming. The fact that cryptoexchangegate.io briefly managed to overtake FTX as the second largest exchange by open interest just goes to show you how vicious competition is in the crypto industry.
Then there’s funding rates, aka how much money traders are putting down to cover their long or short positions, and here the authors note that crypto’s recent price action has turned traders off speculation, which is good news for crypto market volatility.
The authors end the report by examining the assets under management for Greyscale’s bitcoin trust and the pro-shares bitcoin futures ETF, which were approved in October last year. The authors note that the assets under management for both institutional investment vehicles collapsed by more than 50% alongside Bitcoin’s price, which isn’t all that surprising.
The authors also note that the GBTC discount fell below 30% after the SEC rejected Grayscale’s spot bitcoin ETF application.
What Does It Mean For Crypto?
So this brings me to the big question, and that’s what the findings of this report mean for the crypto market. Well, if crypto’s current price action didn’t make it clear enough, the massive purge we saw in Q2 has set the stage for a serious recovery rally, which we’re arguably in.
However, it’s only a matter of time before the markets realize that all the macro factors that caused the recent crypto crashes haven’t been resolved, and this could take crypto to new lows. In fact, you could make the argument that crypto hasn’t seen peak capitulation yet, and not just because many institutional investors like Kevin O’Leary believe we haven’t seen total panic yet.
Although crypto prices have taken a beating, recall that the number of daily DeFi users has remained relatively stable by comparison, that trading volumes have barely budged and that bitcoin’s hash rate continued to climb even while BTC’s price crashed. If what we saw over the last half year had truly been max pay, then it stands to reason that all these metrics would have fallen by much more. Take the bitcoin hash rate, for example. The bitcoin hash rate fell by nearly 50% in previous bear markets, but we’re only 10% off the most recent hash rate highs.
Not only that, but consider that only two entities that were exposed to Terra and Three Arrows Capital have collapsed. Recall that there were nearly two dozen exposed entities and we’re still getting news about some of these running into serious trouble, never mind all the cryptos that 3AC could soon sell.
If you’re wondering when the current recovery rally could end, my bets are on mid-to late September, when Ethereum’s merge is expected to occur and when the Federal Reserve will return from its summer holiday with what’s likely to be a fresh rate hike to fight inflation. Speaking of which, the autumn is also when many parts of the world could start to face skyrocketing energy costs in anticipation of oil and gas shortages over the winter, something that would almost certainly do serious damage to assets across the board, say for oil, gas and the US dollar. Of course, Europe is the elephant in the room in this regard.
[This article is a transcription of a video made by Coin Bureau]
[Original video: https://youtu.be/lkE-5b8-lJw]
