The second half of the year started on a positive note. However, the global macroeconomic situation still controls and negatively affects the markets. This quarter can be characterized as one of stagnation after going through a significant fall. It is also worth considering the many important events and changes that have taken place during this period. Read on for the latest market intelligence and for an in-depth report on the current state of the crypto world.
Key Recap Topics:
- The current state of the crypto market and macro overview
- What happened to Bitcoin this quarter
- Ethereum’s Merge and its performance
- DeFi is not dead, but wounded
- Token sales experiencing decline
The State of the Crypto Market
The third quarter of 2022 was full of hope after the notorious second quarter. Indeed, the first month of Q3 showed very impressive results: the market capitalization recovered by consolidating above $1 trillion and many of the largest cryptos showed remarkably good performance. However, the market began to fluctuate around the $1 trillion mark, and even major events such as Ethereum’s Merge did not lead to significant positive movements. Likewise, a deterioration of the macroeconomic picture influenced the decline of the rest of the market.
The global economy is currently on the verge of recession, and most countries’ central banks are making every effort to prevent the worst forecasts from happening. Most of them are currently focused on curbing inflation. In the US, annual inflation reached 8.3% in August, while some European countries are contending with even higher rates (9.9% for UK and 10% for Germany). Most of all, energy prices are rising, which is putting large consumers in unenviable positions. Among them are cryptocurrency miners, which will be touched upon later.
The main methods of combating high inflation tends to be raising rates, which negatively affects the valuation of investment assets; and the higher the risk of these assets, the higher the impact. Radical rate hikes may have an impact on the economy, but it is not strong enough to immediately reverse trends. At this stage, we can expect to see more rises in key rates and a prolonged market stagnation.
During this quarter, many projects showed very significant growth. In comparison to the previous quarter, with only several notable gainers, there were many projects that showed excellent results in Q3.
The market is currently in a period of stagnation, although it has had a slight recovery, this was accompanied by a decline in trading volumes showing that a global recovery is still unlikely at this moment. Despite the fact that individual projects have been showing very good growth, these are specific cases which are often backed by major market players. Macroeconomic factors are currently greatly impacting the crypto market, so it is difficult to imagine a global growth of cryptocurrencies without an overall improvement of the situation in traditional financial markets.
What Happened to Bitcoin This Quarter
Overall, it has been a mediocre quarter for Bitcoin. The beginning of Q3 was very positive, for example, in July Bitcoin demonstrated +18% price change. However, August and September showed less positive results but it is worth noting that on average, cryptocurrencies tend to perform poorly in these two months.
Nevertheless, Bitcoin has seen other important fundamental changes that are worth mentioning. Notably, Bitcoin is gradually ceasing to be a means of payment and is moving closer to being an investment asset. This transition has two important consequences. Firstly, the popularity of Bitcoin and its acceptance (adoption) is growing (and has been growing very quickly lately), and secondly, its correlation with traditional financial assets is significantly increasing.
Bitcoin’s correlation with traditional financial markets is now near an all time high. Due to this, its connection with the global macroeconomic situation has significantly increased. For example, Bitcoin is very sensitive to announcements such as inflation data or Fed rate hikes.
The ongoing crisis in the financial markets is one of the most important factors currently affecting Bitcoin, and more broadly, the wider cryptocurrency market. Bitcoin may be a deflationary instrument (its supply is limited and is gradually decreasing, thereby making the coin more valuable), but in the current macroeconomic situation, it is showing a negative performance due to rising inflation. Furthermore, Bitcoin is very dependent on many global indices, including the US dollar index (DXY), with which it has a negative correlation.
Additionally, Bitcoin miners are experiencing very big problems at the moment. The decline in cryptocurrency prices has been accompanied by an increase in energy costs. Even a reduction in the price of mining rigs and ASICs has not made mining as attractive as it was last year.
Many large mining companies are finding themselves in difficult situations, and some have already announced their bankruptcy (Compute North). In even more unenviable positions are individual miners in countries with expensive electricity, who have also been hit especially hard by inflation. This has been followed by large sales of their BTC reserves, even at relatively unprofitable prices. This is another factor that has put pressure on Bitcoin’s price and is preventing its growth.
It is also worth mentioning the decline in Bitcoin’s dominance. In early September it reached its lowest level (approximately 35.5%) since May 2018. But it has since grown back above 37%. During Q3 2022 Ethereum’s market dominance showed a slight increase, primarily caused by the positive price action.
Ethereum’s Merge and Its Performance
This quarter has become a very important one for the second-largest cryptocurrency by market capitalization, Ethereum. The approximate date of The Merge was announced in July. Upon news of the event, a very strong month was recorded. Indeed, the exchange rate of the coin increased by +57.7%, which was Ether’s best-performing July in history.
The Merge had been anticipated for a very long time and is likely to become one of the most significant events of 2022 in the cryptocurrency world. After switching to Proof of Stake, Ethereum has become significantly more efficient, as well as more decentralized and secure. However, fees, being the most important factor for Ethereum users, were not expected to change and have not changed (even though they are near the lowest level since 2020 since they are dependent on ETH price; as it goes up, fees might reach $15–50 per transaction again). The effect the Merge might have was uncertain. In anticipation of the event, after it was initially announced, the coin showed very strong growth, but after the merge was completed, Ethereum’s price fell, pulling many other coins with it.
The Merge was accompanied with several Proof of Work hardforks (ETHW and ETHF). These coins were airdropped to all holders of the original Ethereum, with miners given the option to switch their rigs to any of the new networks. However, the performance of these networks turned out to be much worse than the expected forecast. It should be noted that the oldest Ethereum hardfork, Ethereum Classic, showed very good growth, even before the Merge. This can be partially attributed to some miners switching their equipment in advance, resulting in the sharp growth of Ethereum Classic’s hashrate.
It is worth mentioning that it is difficult to determine on which other PoW blockchains the surplus capacity of Ether miners has been distributed to. This will force many miners to forgo mining, sell their equipment, and look for other sources of income, one of which could be Ethereum staking. While the returns might be lower for ETH stakers in comparison to miners, it is more sustainable and easier to maintain, which may benefit stakeholders in the long term.
Ethereum’s long term picture is not yet clear. On the one hand, the network has become more environmentally friendly (which is a priority for many projects in the modern world), and the network’s TPS (transactions per second) has also increased. However, so far, no positive effect has been noted, especially since gas remains high (even though commissions have fallen significantly due to the market downturn and lower demand), and many Layer 2 blockchains are offering more interesting and promising solutions. Ethereum currently dominates the DeFi world, while others, primarily BNB Chain, Solana, and Polygon are dominating other sectors, such as GameFi, which is showing an especially high growth of users. In particular, many projects are switching to Polygon as a main blockchain as a result of the Terra crash. Perhaps more importantly, Polygon is gaining popularity among projects from the non-crypto world, in particular Starbucks, Disney, Robinhood, and others.
After a sharp drop in the 2nd quarter following the collapse of Terra, Decentralized Finance has begun to recover little by little. One of the most important indicators of DeFi is total value locked, which after four months of decline began to demonstrate signs of stagnation. This indicator correlates very closely to the general state of the market, and most of all, to the market capitalization of Ethereum, which is about ⅔ of the total DeFi TVL.
Most leading blockchains in terms of TVL have shown good results in the 3rd quarter of 2022. However, many networks are finding themselves in prolonged periods of decline, with their TVL decreasing month by month.
It is worth noting that Ethereum Layer 2 solutions, in particular Optimism and Arbitrum, showed significant growth during Q3. These projects have even displaced some other blockchains from leading positions, with many projects actively integrating these networks and users testing their products. As mentioned above, Layer 2 blockchains are of increasing interest, and these statistics corroborate this.
Further recovery of DeFi depends primarily on the growth of asset prices. It is important to note that not all users are pulling their assets out of DeFi as a result of the market fall, many projects, despite difficulties, are continuing to operate. However, there is also a concerning side to DeFi. DeFi exploits have become more frequent in recent months, and even large projects are now being attacked. This indicates a lack of security with hackers being able to breach protocols.
Trading volumes have shown a decline and dropped to levels below even the first quarter of this year. Trading volume on derivatives and spot exchanges showed a decrease of 10% and 18%, respectively. Stagnation is often accompanied by a decrease in trading volumes which is, in turn, associated with a decrease in activity in financial markets.
Public Sales and Fundraising Overview
Public fundraising is still in decline which mirrors the market sentiment. The number of token sales was lower in Q3 compared to Q2, 184 vs 233. The number of projects with high profitability for the quarter remains modest, and so are the return on investment multipliers.
Nevertheless, IDO market was undoubtedly better than in the previous quarter. In addition, the number of projects that have chosen to have an IDO as their main token sale model has grown. Although, it is worth noting that many projects are rapidly declining from their All Time Highs in terms of return. This leads to the assumption that many projects are not proving to be interesting to investors, which are ready to sell tokens as they unlock. In the secondary market, these projects are struggling to show impressive results, however, many of them are aimed at more long-term development.
IEOs have also shown good results, but there were much fewer of them this quarter. It is noteworthy that in the last quarter, IEOs showed higher profitability than IDOs, but in Q3 the opposite proved to be true.
An important difference between this quarter and the previous one is that the variety of project categories among primary sales has increased. A Move To Earn boom was evident in the last quarter, following the success of STEPN. However, this category has slowly started to cool down, and at present there are few projects of that type.
In this quarter, two large projects that held an ICO on Coinlist had a token generation event. Even projects from reliable platforms such as Coinlist, turned out to be difficult in the current market conditions. For example, Agoric, a new Layer 1 blockchain, which began trading only after almost 9 months since the end of its ICO, showed a disappointing 14% ATH ROI at its most profitable option, and now it is trading 0.5x, which is approximately a 50% loss. Axelar’s results were not much better (1.17x ATH ROI and 0.68x Current ROI). It is worth noting that many popular projects that have had ICOs on Coinlist are now trading at a loss and this is solely due to the current declining market.
Few launchpads were able to show high average profitability in the 3rd quarter, and even fewer of them were able to maintain it. For all launchpads, their current ROI is significantly lower than their ATH ROI. Most of the leading launchpads in terms of current ROI are reputable sites that have a proven history of good initial offerings and are trusted by users.
Venture capitals poured at least $5.1B into the crypto and blockchain industry in Q3, amid the overall market decline, the amount of raised funds decreased by almost 3 times compared to Q2.
The current initial offering market can be characterized as a period of “waiting”. Many investors are waiting for good projects to appear, and good projects are waiting for the right time to launch. Organizing token sales during the bullrun turned out to be extremely profitable for everyone involved (investors, projects, and platforms), so it is worth assuming that the recovery of public fundraising will occur along with the restoration of the market.
Global markets are currently experiencing incredible difficulties. At the moment, the market is on the verge of a crisis, which may become one of the most turbulent in the history of the world economy. According to some estimates, we may be at the initial stage of the crisis since we’re already witnessing a prolonged decline in many financial indices and national currencies.
The crypto market follows this trend, and as one of the most risky markets it has shown particularly poor performance during 2022. Moreover, it is safe to say that we have been in a bear market for a very long time, but the third quarter was significantly better than the second, when the market showed one of the biggest declines in its history.
It is worth briefly touching upon the slow but steady process of countries creating legislation on cryptocurrency. In particular, work is actively underway on the legalization of stablecoins. The current introduction legislation could significantly accelerate the adoption of cryptocurrencies, even if it is aimed at restrictive actions.
Undoubtedly, a next bullrun will come, and it might even be better than the last one. Every time the market experiences problems, it ultimately becomes stronger and the quality of projects improves. Worth noting that crypto is not just investment assets, but it is also part of the technology industry. We can see that many projects are evolving and new players are emerging on the market. However, before another bullpen, both global financial markets and the cryptocurrency market need to solve their accumulated problems.