💡 The crypto industry entered a deep bear market this year amid tightening Fed policy and shrinking global liquidity. Bankruptcy incidents of major market participants such as Terra, 3AC and FTX have also put pressure. BlockFi and Genesis are still one step away from bankruptcy.
The scale of the collapse
Total market capitalization collapsed by more than $2.2 trillion over the year. Institutional business size at CeFi fell by about 72% and total locked-in value (TVL) at DeFi collapsed by 70%. NFT’s market capitalization is down 42% after the hype at the beginning of the year, and the number of users is down 88.9%.
Despite the dismal results, the industry has continued to grow. Investment and funding in the primary market exceeded $27 billion. At the same time, Ethereum successfully conducted an update to The Merge, which allowed it to switch to a more efficient and environmentally friendly Proof-of-Stake consensus algorithm. It is estimated that the next update of The Surge will take place in the next 6-12 months, which will be a major catalyst for the entire industry.
There has also been a flurry of activity in layer 2 (L2) platforms on Ethereum this year following the release of Optimism Rollup #OP tokens in May. Since then, the total TVL of L2 platforms has grown by nearly 60%. This segment, which is designed to increase the capacity of the mainstream blockchain, was one of the few that showed positive dynamics. L2 is projected to grow ahead of the curve in 2023 on the back of new token offerings by leading platforms and improvements in technology.
This year, the number of cryptocurrency users grew by another 25 million, to 320 million. In addition, some 42 countries and regions passed 105 measures to regulate the crypto industry. At the same time, 36% of the initiatives were positive, which is significantly more than in 2021.
The growing popularity of cryptocurrencies is especially noticeable in developing countries in Africa and South America: it is estimated that about a third of the population has transacted with Stablecoins at least once. At the same time, in developed countries, cryptocurrency payments are still carried out as an experiment. Cryptocurrency adoption is expected to continue, but the pace may be slower due to increased regulatory pressure amid the FTX crash.
When will the bear market end?
At the moment, several factors indicate that the cryptocurrency market is approaching a “bottom.” Popular metrics in the community, such as CVDD and MVRV, are already at levels that coincided with lows in previous market cycles. Significant drawdowns this year have also implemented major position deleveraging, which reduces further downside potential.
The bankruptcy of FTX in November, in turn, forced traders to capitulate and led to another round of “purging” the industry of troubled and inefficient projects. Against this backdrop, the market is expected to gradually digest the problems in the near term and build a solid foundation and infrastructure for further industry development.
Future asset dynamics will also depend on macroeconomic factors and the Fed’s monetary policy. Given Chairman Powell’s recent comments, expect the central bank to raise rates by 25 bps at each of its next three meetings in February, March and May. Crypto-assets are likely to continue to consolidate in a relatively narrow range during this period. Nevertheless, the worst part of the policy tightening cycle will be behind us, so we can expect a gradual recovery in tokens in the second half of the year.
Unless new shocks similar to the FTX crash occur and harsher rhetoric from the Fed and industry regulators follow, $15,000 levels for BTC and $1,000 levels for ETH will be strong supports and likely “bottom” markers in the cryptocurrency market.