Market Update: Q2 2023
Welcome back to another quarterly market update from OP Crypto!
Topics
In this report, we are going to provide high-level quarterly updates on each topic below:
Q2 2023 Market Landscape
Infrastructure
DeFi
NFTs & Metaverse
Q2 2023 Market Landscape
Macro Overview
The second quarter of 2023 witnessed a tumultuous journey for crypto markets, encompassing a range of emotions from FOMO-driven excitement and frenzy around meme tokens, and later, despair following the SEC’s aggressive legal actions against major crypto exchanges like Binance and Coinbase. These significant events, along with the news surrounding Blackrock’s ETF filing and the Ethereum Shapella upgrade, more or less capture the major developments observed in the crypto sphere during the past three months.
On a global scale, the second quarter of 2023 brought positive outcomes for financial markets. Economic data indicates that the US economy is currently not in a recession, a favorable indication for global markets. Inflationary pressures also appear to be subsiding. Furthermore, the losses incurred in the crypto market were reduced by 50% in Q2 2023, totaling only $300 million. As the crypto industry has seemingly stabilized throughout the quarter, traditional institutions have once again displayed an interest in Bitcoin — as seen by the Blackrock ETF filing, which has encouraged other major asset managers to follow suit.
Although the possibility of the Federal Reserve cutting rates in the near future exists, doubts remain regarding their ability to orchestrate a smooth economic transition, and concerns persist about potential bank failures resulting from the ongoing banking crisis.
Considering the current market sentiment, however, the overall temperature in the crypto market is currently positive, leading us to believe that the market is in a phase of recovery.
Infrastructure
SHAPELLA UPGRADE
The eagerly anticipated Shapella update was implemented on Ethereum in April, introducing new features such as Ether unstaking.
Shapella is a term coined by the community, combining “Shanghai” and “Capella,” two simultaneous upgrades to the Ethereum network. This hard fork represents a significant milestone in Ethereum’s roadmap and has generated excitement among community members regarding the future prospects of the network.
According to blockchain analytics firm Glassnode, despite the Shapella update allowing the unlocking of staked ETH, less than 1% of validators are planning to sell. The firm reported that only 253 validators have registered for an exit. Moreover, mechanisms are in place to prevent a sudden flood of ETH supply from being dumped into the markets simultaneously.
One anticipated outcome of the Shapella update is the increased participation of institutional investors in Ethereum. Freddy Zwanzger, Ethereum ecosystem lead at Blockdaemon, anticipates that larger investors may show more interest in ETH staking opportunities now that a clear withdrawal option is available.
Exciting prospects lie ahead for Ethereum, including the upcoming major feature, EIP-4844, designed to enhance the scalability of rollups on the network.
ARTIFICIAL INTELLIGENCE
Artificial intelligence (AI) has become a buzzword this year, captivating both the traditional tech industry and the crypto space with its novel applications and services.
The AI sector presents numerous undeniable use cases and innovative applications. At OP Crypto, we have invested in several AI-based projects ourselves.
Our exceptional research team has conducted an extensive analysis of the AI trend and produced a comprehensive report highlighting the intersection of AI and Web3, uncovering new and exciting investment opportunities.
- To read the full research report, click HERE
DeFi
Infrastructure
SHAPELLA UPGRADE
The eagerly anticipated Shapella update was implemented on Ethereum in April, introducing new features such as Ether unstaking.
Shapella is a term coined by the community, combining “Shanghai” and “Capella,” two simultaneous upgrades to the Ethereum network. This hard fork represents a significant milestone in Ethereum’s roadmap and has generated excitement among community members regarding the future prospects of the network.
According to blockchain analytics firm Glassnode, despite the Shapella update allowing the unlocking of staked ETH, less than 1% of validators are planning to sell. The firm reported that only 253 validators have registered for an exit. Moreover, mechanisms are in place to prevent a sudden flood of ETH supply from being dumped into the markets simultaneously.
One anticipated outcome of the Shapella update is the increased participation of institutional investors in Ethereum. Freddy Zwanzger, Ethereum ecosystem lead at Blockdaemon, anticipates that larger investors may show more interest in ETH staking opportunities now that a clear withdrawal option is available.
Exciting prospects lie ahead for Ethereum, including the upcoming major feature, EIP-4844, designed to enhance the scalability of rollups on the network.
ARTIFICIAL INTELLIGENCE
Artificial intelligence (AI) has become a buzzword this year, captivating both the traditional tech industry and the crypto space with its novel applications and services.
The AI sector presents numerous undeniable use cases and innovative applications. At OP Crypto, we have invested in several AI-based projects ourselves.
Our exceptional research team has conducted an extensive analysis of the AI trend and produced a comprehensive report highlighting the intersection of AI and Web3, uncovering new and exciting investment opportunities.
- To read the full research report, click HERE
DeFi
OVERVIEW
During the second quarter of 2023, crypto trading volumes experienced a decline, reaching yearly lows as market makers reduced their trading activities, as reported by data from Kaiko.
The average daily trading volumes for the top 10 tokens (excluding stablecoins) in Q2 2023 were $10 billion, compared to $18 billion in the first quarter of the year.
This decrease in trading volumes can be attributed to intensified regulatory scrutiny over the past month, which may have prompted traders and market makers to adopt a more cautious approach. Recently, both Binance and Coinbase, two prominent cryptocurrency exchanges, faced lawsuits from the U.S. Securities and Exchange Commission (SEC).
In terms of individual token market share in Q2, Bitcoin experienced a decline of approximately 20 percentage points from its peak at the end of March. On the other hand, Ether outperformed Bitcoin, increasing its share of trading volumes by 5 percentage points. Binance’s BNB also witnessed a rise, climbing from 2% to over 7% of trading volumes in recent days amidst concerns surrounding Binance’s regulatory situation.
BTC TRANSACTION REACH ATH
During the peak of the meme token frenzy, daily transactions of Bitcoin surpassed 600,000 for the first time in history.
In Q1, Bitcoin transactions had already been accelerating due to the introduction of Ordinals, which allowed the creation of “inscriptions” tied to a satoshi (Bitcoin’s smallest unit), similar to NFT-like artifacts.
Later in Q1, a pseudonymous developer extended Ordinals’ functionality by enabling the creation of BRC-20 tokens, akin to Ethereum’s ERC-20 tokens, but with each token’s supply being a set of satoshi inscriptions.
Within four months, over 30,000 BRC-20 tokens were created, mostly comprising meme tokens. The meme token speculation spilled over into Bitcoin, resulting in the aggregate market capitalization of BRC-20s surpassing $1 billion.
ETH DEFLATION
May 2023 witnessed the most significant reduction in Ether’s supply in history. The annualized net issuance rate of Ether (inflation rate) dropped to as low as 3.75% in May during the meme token frenzy.
Following the transition to proof of stake in September of the previous year, the amount of ETH issued per block decreased by 90%, making ETH more likely to become deflationary when transaction fees increase and more ETH is burned.
Since then, Ethereum’s fees have stabilized within the range of 15–25 Gwei over the past few weeks. Additionally, the increasing amount of ETH being staked has led to slightly higher issuance.
NFTs & Metaverse
OVERVIEW
The NFT space has witnessed significant developments, illustrating continuous expansion and transformation. As we commemorate one year since the groundbreaking Terra Luna event, the market demonstrates signs of maturation and progressive growth. However, this evolution also brings changes to the status quo.
In May 2023, the NFT market displayed potential shifts. By mid-month, the trading volume for NFTs reached $333 million, with 2.3 million sales. If this trend continues, it may result in the first month of the year with a trading volume below $1 billion.
One notable trend observed at the beginning of the month was the substantial number of traders selling their large NFT holdings at a loss to participate in the Memecoin frenzy. This surge in on-chain activity led to gas fees on the Ethereum network exceeding $100. Consequently, the increased transaction costs negatively impacted the volume of low-value NFT trades on the blockchain as traders grappled with affordability concerns.
Another noteworthy event was the Pudgy Penguins project securing $9 million in seed funding, with 1KX leading the investment. The project also introduced its Pudgy Toys collection on May 18, which amassed a total trading volume of $7.89 million in the following week, representing an 89.65% increase and securing the sixth position in the seven-day NFT rankings.
ETH DOMINANCE FADING
Since the advent of NFTs, Ethereum has consistently maintained its position as the preferred blockchain for the majority of NFT collections. As of mid-May 2023, Ethereum continues to dominate the NFT industry, commanding 81% of the market with over $270 million in NFT trading volume. However, in terms of the number of NFT sales, Ethereum’s dominance decreases to only 5.7%, indicating that the platform is primarily utilized for high-volume sales, positioning it as the choice platform for the “NFT aristocracy.”
Nevertheless, other blockchains are also making their mark in the space. Solana holds the second position with a trading volume of $22.7 million, accounting for 6.7% of the total trading volume and capturing a 13% share of NFT sales. Close behind is Polygon, which boasts a trading volume of $18.2 million and a significant 26.9% dominance in NFT sales, establishing it as the most dominant blockchain in terms of sales count. This aligns with Polygon’s recent strategic moves, as it attracts various Web 2.0 projects for launching NFT initiatives with a lower entry price, and it hosts numerous games with NFT mechanics such as Planet IX, The Sandbox, and Oath of Peak.
BLUR VS OPENSEA SAGA CONTINUES…
In the dynamic realm of NFTs, the competition for marketplace dominance is an ongoing narrative worth monitoring. As of mid-May 2023, Blur holds the lead with a substantial 62% market share, leaving OpenSea trailing at 26%. However, OpenSea retains the largest number of traders, with 104,882 active users over the past seven days compared to Blur’s 12,747.
*Disclaimer
GENERAL
This presentation is not an offer to sell securities of any investment fund or a solicitation of offers to buy any such securities. Securities of any private investment fund to be offered or managed by OP Crypto Capital Management Ltd. (“OP Crypto) are offered to selected investors only by means of an offering memorandum and related subscription materials which contain significant additional information about the terms of an investment in OP Crypto (BVI) Fund I L.P. (the “Fund”, and such documents, the “Offering Documents”). Any decision to invest must be based solely upon the information set forth in the Offering Documents, regardless of any information investors may have been otherwise furnished, including this presentation.
An investment in any strategy, including the strategy described herein, involves a high degree of risk. There is no guarantee that the investment objective will be achieved. Past performance of these strategies is not necessarily indicative of future results. There is the possibility of loss and all investment involves risk including the loss of principal. Securities of the Fund are not and will not be registered with any regulatory authority, are offered pursuant to exemptions from such registration, and are subject to significant restrictions.
Information on performance of the Fund generally or our recommendations over the last year is available upon request. The information in this presentation was prepared by OP Crypto and is believed by OP Crypto to be reliable and has been obtained from public sources believed to be reliable. OP Crypto makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this presentation constitute the current judgment of OP Crypto and are subject to change without notice. Any projections, forecasts and estimates contained in this presentation are necessarily speculative in nature and are based upon certain assumptions. It can be expected that some or all of such assumptions will not materialize or will vary significantly from actual results. Accordingly, any projections are only estimates and actual results will differ and may vary substantially from the projections or estimates shown. This presentation is not intended as a recommendation to purchase or sell any commodity or security. OP Crypto has no obligation to update, modify or amend this presentation or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, project on, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
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FORWARD LOOKING STATEMENTS/PROJECTIONS
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Certain information contained herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “anticipate”, “project”, “estimate”, “intend”, “continue” or “believe” (or negatives thereof) or other variations thereof. Due to various risks and uncertainties, actual events or results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements, and there can be no assurance that unrealized investments used to calculate the return information set forth herein will ultimately be realized for their assumed values. As a result, investors should not rely on such forward-looking statements. Expected revenue and other operational metrics are estimates provided for illustrative purposes only and do not reflect guaranteed results. No representation is being made that the Fund will or is likely to achieve any such estimates shown and actual results may be higher or lower. Any estimate has inherent limitations, including that actual market or economic factors or the assumptions of the Investment Manager may differ materially from actual results.
GRAPHS AND CHARTS
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POSITIONS
The holdings identified do not represent all of the securities purchased, sold, or recommended for the Fund. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Past performance does not guarantee future results. Additional information, including (i) the calculation methodology; and (ii) a list showing the contribution of each holding to the Fund’s performance during the quarter will be provided upon request.
INVESTOR LETTERS/REPORTS
CONFIDENTIAL & PROPRIETARY: This material does not constitute an offer to sell or the solicitation of an offer to buy any securities. Please refer to relevant offering memorandum and other related documents for additional information. Any data here is obtained from what are considered reliable sources; however, its delivery does not warrant that the information contained is correct. Any reproduction or other distribution of this material in whole or in part without the prior written consent of OP Crypto Capital Management Ltd. is prohibited.
This report is for informational purposes only and should not be construed as investment advice. It is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. Our research for this report is based on current public information that we consider reliable, but we do not represent that the research or the report is accurate or complete, and it should not be relied on as such. Our views and opinions expressed in this report are current as of the date of this report and are subject to change. Past performance is not indicative of future results.
