Crypto Market Year review
This year, like many before itt, has been rich in events, news, and price movements. The global financial market saw record highs in stock and cryptocurrency values at the start and a post-covid reassessment of the outlook for many sectors, including technology.
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The discussion among experts about the prospects for the US and the global economy, which began in late 2021, had become increasingly active by early spring. Macro statistics, unemployment data, resource costs, components, and logistics data raised growing concerns about the market outlook.
As a result, high, persistent global inflation became a fact that could not be ignored. The financial authorities of the world’s major economies began the process of raising interest rates, but different countries had different dynamics and expectations about the final effect of these processes. Therefore, the high correlation between major equity markets, including cryptocurrencies, was replaced by turbulence and fragmented cash flows.
Since May, local factors in each market have become increasingly important. The US interest rate hike was faster than other markets and outpaced the rate of inflation, the dollar index strength was replaced by a year-end decline, and European and Asian markets began to show stronger momentum in anticipation of affordable and accommodative funding conditions soon to come. In this situation, the crypto market was left to itself — large trading liquidity left the niche market as part of a risk-reduction and global diversification regime.
At the moment, the refinancing rate in the US market is close to its maximum values in recent years — 4.00–4.25. However, the future prospects for the maximum level of tightening are contradictory. As practice has shown us, the Fed is late to react to changes in market conditions, and at the end of the last meeting, issued a statement that the rate does not intend to be reduced in 2023. However, stock traders have a different opinion and expect the beginning of a reduction in autumn 2023. This metric is extremely important for cryptocurrencies, as the past cycle of low rates and cheap liquidity was one of the main reasons for last year’s price records.
Overall Crypto Market Capitalization
Since the beginning of the year, crypto market capitalization has nearly tripled from its peak of 2.25 trillion to 780 billion at the end of the year. The market went through a series of shocks in a very short time. The collapse of the entire LUNA blockchain ecosystem in May and the ensuing bankruptcy of major hybrid CeDeFi crypto lenders culminated in the epochal bankruptcy of one of the largest crypto exchanges, FTX. Such events inevitably make us reevaluate the meaning of “reliability” and “decentralization”. However, it is the fully decentralized protocols (such as AAVE and Maker) that have shown us that they can withstand stress tests as intended, and passing this “obstacle course” only underscores their merits as a future alternative to traditional finance.
The Spot Market
Trading volume in the spot market has declined following the decline in cryptocurrencies. From a peak of over 800 billion in January to just under 600 billion in November. The trend intensified in early fall and peaked in November after the FTX drop.
It should be noted that the three largest exchanges (Coinbase, Kraken, and BinanceUS — among the exchanges directly accepting deposits in fiat currencies) benefited from this event substantially. In general, the decline in trading volume doesn’t come as a surprise and is not a critical change for the industry, which would only really have an impact on the valuations of public companies.
Another new trend — the ecosystem war on stablecoins — is associated with much more serious and long-term consequences. Competition in the marketplace in the face of liquidity downturns has intensified significantly, leading to a search for new advantages between trading ecosystems. Stablecoins have taken the place of a clear first gateway for new entrants into the industry. The logic of retaining current users and attracting new ones has forced Binance to remove the second most capitalized USDC stack from quotations, leaving the ability to trade cryptocurrencies only with BUSD and USDT. Such actions were not slow to affect issuance volume, which for BUSD rose from 14 billion in the spring of 2022 to 22 billion in November. USDT remains the most popular stablecoin, but in the future, the representation of different stablecoins in different blockchains will be much more important in the fight for the end user.
Futures trading volume has also declined, but differently for Bitcoin and Ether. While 13–15 billion was standard for the former cryptocurrency at the beginning of the year, this figure had halved to 7.5 billion by the end of the year. For Ether, similar metrics started at 7.5 billion with a downward trend. However, a change in the consensus algorithm to a proof-of-stake mechanism has spurred interest in ETH. A small summer local bull run even resulted in a micro gamma squeeze on options. As a result, the current volume of open interest has stabilized at 5.5 billion with a noticeable upward trend.
As a first approximation, the options market shows a similar trend as the futures market. There were peaks at the beginning of the year (15 billion for Ether and 20 billion for Bitcoin) and then a consecutive decrease thereafter (to the level of 10 and 12 billion, respectively). However, this point requires further research.
Most centralized trading takes place on the Derebit exchange in inverse form. I.e. quoted in US Dollars. However, the margin and delivery take place in the base currency, so the volume of open interest in BTC and ETH would be a more obvious metric. Indeed, from this point of view, the situation is quite different — the decline in spot prices has prompted many traders to seek hedging specifically in the options market. As a result, the crypto-nominated level of interest doubled for Bitcoin and more than tripled for Ether. Of course, Ether’s rise has been impacted by the shift in consensus and the possibility of organizing additional returns from participating in validation and long-term storage, which naturally forces rational investors to hedge price risks.
Three, almost synchronous, spikes on the annual implied volatility chart reflect major shocks to the crypto market. Luna/CeDeFi/FTX are the three main culprits behind the extreme lag of cryptocurrencies in global markets. However, it is worth noting an interesting pattern — while volatility spikes have been higher, price swings on the spot market have been lower. So, the fall in Luna led to a decline from 40,000 to 25,000 (-37.5%), Celsius and 3AC sent the market from 29,000 to 20,000 (-31%), and FTX from 21,000 to 16,000 (-23%). While volatility indicators were setting annual records one by one. In theory, this difference could indicate an increasingly less negative news impact on price and that the market is about to reach its downside limit.
The total amount of liquidity within blockchains is 39 billion, having decreased by 4 times. The blockchain Ethereum remains the undisputed leader in this indicator. The Blockchain Tron came in second place, ahead of the BNB Chain and Solana (whose business declined after the FTX collapse). Tron gained an advantage after the collapse of the LUNA blockchain by offering a competitive deposit rate for stablecoins on the JustLend lending protocol.
The size of the major crypto companies’ treasure funds has declined from winter highs by 80%, and along with the stabilization of Ether’s exchange rate, has frozen at the 5 billion mark. Ultra-competition in the dApp market has continually motivated projects to improve their own products by adding new functionalities and improving basic algorithms. As a consequence, many have managed to earn a significant amount. In general, there are profitable companies in many sectors — NFT trading, derivatives trading, swap exchange aggregation, and games. Having leaders generating inbound financial flow is important to test hypotheses about the state of the market, and will make it easier for startups to attract investment next year.
The self-regulation of DeFi. The situation with Tornado Cash and the decision of multiple Ether validators to voluntarily comply with OFAC sanctions will get a follow-up. It is possible that some services will try to introduce some semblance of KYC at the start of their work to check users for insurance.
A strengthening trend on the order book and CLOB (centralized limit order book) is visible. Collecting quotes (both centralized and decentralized) in one hybrid data provider makes trading much more efficient.
DeFi became adult. In market crises, decentralized finance services did not suffer significant losses in contrast to their centralized counterparts. Smart contracts proved to be more efficient than the human factor.
New big institutions are coming. The bankruptcy of numerous large crypto companies on the one hand opened the way for new players on the market. On the other hand, it allowed us to confirm the concept about the profitability of the market segment for large hedge funds and investment banks. The next wave of institutional liquidity will enter the market with strict administrative procedures and regulations in place.
Changing models of income. Earnings are not only from the growth of quotations but also from the provision of services. If earlier, the main income model implied buying cryptocurrencies and selling after multiples of price growth, now, with the launch of PoS on Ether there is an opportunity to get a clear passive income with clear risks in a liquid market. The development of the options trading industry also allows for returns without directly selling the crypto asset. These factors increasingly motivate managing the long-term yield curve of an asset rather than simply speculating.
There’s also a blockchain alternative to app stores. The best way for developers to distribute revenue would definitely be via a blockchain where in terms of commissions, it would be inexpensive, rather than the app store with its -30% rate for each transfer
Mass NFT partnerships — as an example of crypto-institutional B2B. The Polygon team’s marathon to provide its infrastructure for issuing NFT collections to major global companies has proven that the technology is in demand and can be accepted by corporations.
Migration of complex derivatives from traditional markets. Interest rate options, hybrid swaps, bond options -– for the new yet mature institutional participants, such instruments will come to market.
Options dominance will grow. The trend of increasing trading volumes and open interest will continue not only because of the attractiveness of the instrument but also because of the arrival of new large institutional “behemoths” — professionals of the capital market.
New models of complex real returns will have an advantage over inflation- and issue-driven capital raising. It will no longer be as easy to raise liquidity against the issuance of project tokens with enormous domestic inflation as it used to be. Revenue participation and reward distribution based on smart contracts is a new trend that will determine the direction of crypto-assets between different blockchains in the new year.
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