Slow but Continued Recovery of the Crypto Economy in Q3

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The cryptocurrency market had many chaotic events in the second quarter of 2022, including Terra’s collapse and the bankruptcies of Celsius and 3AC. These things, along with decreasing favorable macroeconomic conditions, make Q2 2022 extremely difficult for the cryptocurrency market. Following these incidents, there was a period of stagnation during which many crypto assets started to drift sideways. However, the bitcoin market is not at rest. In the third quarter of 2022, numerous cryptocurrency projects released important news.

  • A price drop of 2.63% from Q2 2022 to Q3 2022 brought negative returns for Bitcoin.
  • In the third quarter of 2022, the valuation of cryptocurrencies was in the vicinity of $1 trillion.
  • As was initially anticipated, the success of The Ethereum Merge did not immediately cause a rise in the price of ETH.
  • At the November FOMC meeting, the Fed will likely raise interest rates by 75 BPS once again due to the extremely high inflation rate.
  • There is a lot of competition in the crypto layer-1. Comparatively speaking, Solana and Binance Chain see the most user activity.
  • Ethereum still dominates the revenue share for blockchain networks.
  • The third quarter (Q3) of 2022 saw a 36% drop in the global crypto market’s losses due to hacks and scams, from $670 million to $428 million.
  • The Defi, NFT, and other sectors markets are seeking to recover from the instability evident in the second quarter, which saw a significant decline in all three. Like other cryptocurrency-related sectors, they are both experiencing stagnation.

Bitcoin (BTC) and Ethereum (ETH) had severe declines in Q2 2022, with quarter-to-quarter drops of roughly -56% for BTC and -67% for ETH. BTC fell by 2.63% from quarter to quarter in Q3 2022, while ETH increased by 24%.

Kunji trading view chart
Source : Tradingview

In September 2022, a significant event like the Ethereum Merge provided a reason for hope for the cryptocurrency industry. However, the practical completion of the Merge had little impact on price fluctuations. The worsening of the macroeconomic factors also affects the market movement, which has the propensity to stagnate. Despite rumors concerning Bitcoin and the stock market, the correlation between the total market cap of cryptocurrencies and the S&P 500 remained high in Q3 2022, at 0.85; nonetheless, this was a small fall from the previous quarter (0.92).

Typically, September is a bad month for bitcoin. For the past five years, September has seen a decline in the price of Bitcoin. The graph above demonstrates that BTC enjoyed a substantial rally toward the price of $22.8K at the beginning of September. The price dropped to $20K the following day, though. The decrease brought about a deeper correction that lasted until early October. BTC then repeatedly fell till it reached $18,000. Nevertheless, there is hope since the price has not fallen below the June low of $17.6K.

Macroeconomics Roundup:

Global economic conditions are unclear due to inflation and recessions. Many analysts predict that “cash is king” in 2022, i.e., that fiat currency, especially the US dollar, will be the best asset. This is supported by the below graph of US dollar strength (DXY). DXY charts have been rising since the start of 2022, and this trend has not yet stopped. As is common knowledge, DXY trends and Bitcoin typically exhibit an inverse association. The dollar’s increasing strength suppresses the fluctuation of the BTC price.

Kunji trading view chart
Source: Tradingview

The Fed (FOMC) meeting on September 21–22 led to an additional 75 basis points (0.75%) increase in interest rates. The benchmark interest rate set by the Fed now stands at 3-3.25%. The BTC chart shows that it dropped before and after the FOMC meeting. Interest rates have increased by an additional 75 basis points (0.75%) due to the FOMC meeting on September 21–22. The Fed’s current benchmark interest rate is 3.25 to 3.325 percent. Even though Q3 for Bitcoin was quite volatile, it still managed to outperform all asset classes save the US Dollar Index (DXY). However, when looking at the YTD performance of other asset classes, Bitcoin still suffered the most significant loss, of -58%. The EUR and GBP have almost reached parity compared to the US dollar.

On the other hand, those with a portfolio tilted towards commodities and energy have benefited substantially, as these assets have seen a significant price increase and are the primary driver of inflation. It is interesting to note that commodity and energy prices have started to decline over the past quarter, regardless of whether this is a reaction to the Federal Reserve’s tightening of monetary policy or other factors, such as the expectation of declining demand due to a recession or a potential improvement in supply chain issues.

Ethereum’s Successful Merge and Defi Roundup:

The Ethereum merge event and its transition to a Proof-of-Stake (PoS) method happened with a decrease of 15.75% from the previous month. Investors who have received airdropped coins continue to lose money while using ETHW, the native asset of the Proof of Work (PoW) chain, with a loss of 76% in September.

On the other hand, Optimism and Arbitrum reportedly reached $1 billion in TVL, a significant increase from the prior quarter. The Merge contributed to a rise of 263% and a gain of 35.555% in optimism and arbitrum, respectively. Despite a weak price rally leading up to the Merge, ETH still ended Q3 with a +26% positive price return, which is a significant increase over the first half of 2022. However, the YTD price return for ETH remains damaging at -64%.

Kunji trading view chart
Source: Defipulse

Defi showed full recovery, reflected by a 2.9% rise in TVL since Q2. With $48 billion and a 6.9% rise, Ethereum remains the most significant chain. With an increase of 10.89% and $6.6 billion in TVL, the BNB chain comes in second. Additionally, Tron’s TVL increased to $5.7 billion, up more than 46% from the previous quarter. However, compared to Q2, the TVL for Polygon, Solana, and Avalanche has dropped by 9.24%, 20.36%, and 28.78%, respectively. More than $6 million was cut from Solana due to the August hack. In Q3 2022, attacks primarily targeted decentralized finance (Defi) instead of centralized finance (CeFi).

The Top 15 stablecoins’ market cap decreased by 3%, or $4.7B in absolute terms, from Q2’s performance. There were no new entries or changes to the order of the top 5 stablecoins, Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and Frax (FRAX). Within the Top 5, there were noticeable changes in market cap, with USDC falling 16% or $9 billion after OFAC sanctioned Tornado Cash. The most significant increase in market cap was for BUSD, which climbed by 18% or $3 billion due to USDC inflows and Binance’s announcement of BUSD auto-conversion.

NFT Roundup:
Over the past quarter, the NFT market has experienced some noteworthy changes that point to a slight maturation of the industry. While it is debatable whether NFTs have lived up to the hype generated during the previous bull market, it is crucial to remember that the technology is still in its infancy and has only recently become more well-known—the mint of BAYC was only 15 months ago.

Source: Theblock

The Top 5 NFT marketplaces, OpenSea, Magic Eden, LooksRare, X2Y2, and CryptoPunks, saw a -77% decline in total trading volume over the past quarter, severely hurting the NFT business. According to data from September, 85% of X2Y2’s volume may have been from wash trading, which would have given it the upper hand over OpenSea in the standings. The same is true for LooksRare, which is still ostensibly driven by 87% wash trades despite its already paltry volume.

It must be noted that the decline was worse in the third quarter, with a loss of more than 75% in the volume of dollars traded, even if the second quarter showed a drop of around 25% compared to the first quarter. The entire book of resale profit, which fell from $2 billion in the second quarter to only $326 million during the time, a split of profit by 6, is the most noticeable decline. The number of resale losses also decreased at the same time, from $1.4 billion to around $780 million. Even if this volume was cut in half, it was not enough to turn a profit in NFT trading this quarter.

Concluding Thoughts:

For the past three years, BTC has had profitable Octobers. Bitcoin sold for around the US $19,800 as of October 14, 2022. Following the publication of US inflation statistics, BTC was able to recover after dropping to its lowest point of $18,2k. The current BTC price surge is probably just temporary, given the dismal state of the world economy.

Source: CME fedwatch tool

Additionally, over the past five years, the fourth quarter of BTC has decreased three times. BTC fell by -45.55% during the 2018 Bear Market. Additionally, the Fed’s monetary policy and the state of the world economy will impact the movement of Bitcoin this quarter.
The likelihood of 75 bps is around 100%. Additionally, there are 2,8% reasonable interest rates of 50 basis points, although this is considered impractical given the high inflation rate. Inflation can only be stopped by raising the Fed’s benchmark interest rate.

It is helpful in quickly considering the trend of governments implementing cryptocurrency legislation gradually but consistently. Significant attempts are being made, in particular, to legitimize stablecoins. The current cryptocurrency introduction law may significantly increase the acceptance of cryptocurrencies even though its primary goal is to restrict certain behaviors. There will undoubtedly be another bull run, and this one might be much more powerful than the previous one. The market eventually gets more substantial, and the caliber of projects rises after each setback. It is important to note that cryptocurrencies are not only valuable financial assets but also a vital component of the tech industry. New market participants are emerging, and numerous projects are being developed. However, the cryptocurrency market and the world financial markets must work out their flaws before there can be another bull market.

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