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Markets Year-End Wrap: The State of Play – Bitcoin, Ethereum, Alts and Stablecoins

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Granted the blockchain sector has delivered numerous exciting developments this year, the crypto market has been chaotic for the most part and off-putting to many traders. Heading into the last week of the year, here's a look at the latest stories and a detailed assessment of significant events this year.

Christmas hype soaked up by the market's stagnating momentum

The total crypto market has continuously shrunk across the last three quarters in a familiar display of the volatile nature of digital assets. Headline among the events contributing to this outturn is the fall of the Terra ecosystem in May which perhaps marked the onset of many misadventures. The event wiped approximately $500 billion off the total market capital between May 05 and 12, arguably triggering many domino effects on entities associated with it. Notable price declines were observed across the crypto market in the second week of June and first week of November – the latter as a result of FTX's ongoing foundering.

Crypto total market capital. Source:TradingView

Last Friday, most coins registered modest price dips signaling more potential volatile action as the year draws to a close end after a somewhat dormant first half of December. Glassnode analysts recently indicated that the short-term realized volatility for Bitcoin is tracing two-year lows of 22% (1-week) and 28% (2-weeks) with a similarly observed contracting futures volume. In the latest edition of the weekly newsletter, the analysts pinpointed “tightening liquidity, widespread deleveraging, and the impairment of many lending and trading desks” as justification for the depressed volume figures.

Bitcoin annualized realized volatility. Source: Glassnode

Influences acting at a macro level have spared no markets, not even digital assets, where their felt impact has debunked the misconception of Bitcoin being an inflation-resistant asset. Commentators have shared varying projections for the home stretch, but the constant has remained the underwhelming bearish tone that is now closing its thirteenth month, at least for Bitcoin.

Has Bitcoin already hit bottom in this cycle?

Even as it struggles to break out in the current market, former co-founder of BitMEX Arthur Hayes has explained why he believes Bitcoin has bottomed out. Hayes recently opined, “Pretty much everyone who could go bankrupt has gone bankrupt”. Speaking with podcaster and crypto proponent Scott Melker, the derivatives trader  blamed centralized lenders' Bitcoin policy for the current ‘mess.' Given that the Bitcoin that these “largest most irresponsible entities” have been selling in the bear market has now run out, the market is literally at its bottom, setting up for a recovery. On-chain data corroborate that most speculators have exited the space as reflected by the Bitcoin Long-term Holder supply, which is up to its highest level in history.

BTC/USD price chart. Source: Messari

The former executive, now turned blogger, explained that whenever centralized lenders find themselves in financial difficulties requiring them to settle their depositors, their first course of action is usually recalling loans. Such is the case this time, but Hayes reckons that hasn't been adequate financial reserves to effectively save them from bankruptcy, singling out Three Arrows Capital and Alameda Research as firms that cleared out their Bitcoin for liquidity.

The US Treasury market is predicted to break down, soon

Haye's comments mirrored his Dec 9 blog post, in which he explained that the market's present state is a result of a destructive cycle in which centralized lenders are pressing trading firms to repay their loans. The squeezed entities end up liquidating their positions to cope with the demands. Once these mainstream lenders are done with the short-term loans, they pursue collateral on loans to recoup some more funds.

The crypto investor was also adamant that the US Federal Reserve's tightening monetary policy will result in a defective Treasury market sometime next year. Hayes holds that once this happens, the Federal money printer will get running again, and in extension, crypto and other risk-on assets will shoot higher. Until then, crypto investors will have to contend with the harsh conditions post-FTX bankruptcy.

Bitcoin's recession test could come as soon as 2024

The Bitcoin advocate further advised that while the asset can pull a recovery in 2023, its real test will be the recession – one he predicted to come as soon as 2024, potentially causing a “generational collapse.” He argued that Bitcoin must outperform the extreme inflation levels in this environment to prove its usefulness.

While some feel that those to be flushed out have already been expelled, others theorize that the current weather will persist until the traditional financial landscape favors a long-term accumulation phase that can overturn bears. The latter scenario alludes to the exhaustion of the prevailing negative sentiment, which has persisted even with Bitcoin trading as low as 65% below its price at the start of the year.

A year to forget for bulls and long traders

The BTC/USD pair has been restrained below $18,500 for more than six weeks since Nov 8, with the closest ascent leading to the sight of this mark – in the form of CPI Nov data boost – suffering rejection around $18,320. This week's revisit to $16,400 on Monday underlines the state of short-term instability around Bitcoin price. An observer reviewing the MVRV ratio opined in a quick take post featured on CryptoQuant that there could be more pain for holders in the coming days.

Bitcoin historical price chart. Source: Messari

Blockchain data and intelligence platform Glassnode observed in a Dec 8 update that the current market is similar to the 2018 cycle. In the twelve-month period leading to the update, the market recorded $213 billion in realized losses attributed to Bitcoin investors (against $455 billion in realized profit) as per data from the analytics and insights. The observation translates to a relative capital loss of 46.81% of the bull market gains compared to an equivalent ratio of 0.486 adjusted to 47.86%.

Illustrating the 10-year view of Bitcoin's funds moving on and off exchanges, on-chain market intelligence provider Santiment observed in a Dec 22 post that the number of coins on exchanges has been trending at its lowest levels (1.2M BTC) since November 2018. Meanwhile, the volume of coins on exchanges in self-custody is tracking a historical high of 18.2M BTC. Early this week, Reflexivity Research's Will Clemente noted that the percentage of Bitcoin supply controlled is up to 17% this year – an encouraging figure considering the asset has only been around for a dozen years. The number of active developers in the Bitcoin ecosystem has, however, been declining this year due to an array of factors, including poor market performance

Crypto hacks and DeFi exploits

The upcoming year has lined up as one that will see many regulations introduced to the space to protect consumers from market manipulation. Nonetheless, a more significant threat lies in DeFi exploits. A Dec 22 AP news post detailed that North Korean hackers have so far this year walked away with about 800 billion won ($626 million) in crypto and other virtual assets. Roughly 100 billion won ($78 million) has been from local victims. In total, these hackers have illegally obtained digital assets worth 1.5 trillion won ($1.2 billion) since 2017, according to a featured report from the country's National Intelligence Service.

Another report estimates $4.3 billion in total revenue has been tied to crypto-related scams so far, with 97% of the actual stolen fund being through drained DeFi protocols. Breaches on cross-chain bridges have resulted in losses of $1.4 billion led by Axie Infinity's Ronin hack that saw nearly $600 million siphoned. Another $320 million was swept away in the Wormhole crypto bridge, while roughly $100 million was stolen from the Mango Markets platform.

Token Terminal data shows more than $2.5 billion in losses has been chalked up to exploits targeting cross-chain bridges since 2020. Data from market integrity platform Solidus Labs shows that more than 117,000 scam tokens were launched between January and the end of November. The report from the market monitoring team also found that almost 2 million investors have been victims of hacks associated with rug pull tokens. Security experts caution that these attacks will remain a common occurrence in 2023 as there is no one-stop solution to the vulnerability of these bridges. The latter is almost inherent, as the security of bridges also depends on the security of the blockchain networks it serves.

zkEVM developments:  The missing piece in blockchain infrastructure

Realizing a full-featured zero-knowledge Ethereum Virtual Machine (zkEVM) solution with power to unlock even more potential in terms of smart contracts portability outside custom execution environments has been the ultimate goal for actively-building ecosystems that leverage Ethereum as the base network. This is down to the touted ability of these virtual machines to securely scale at low transaction fees while achieving faster finality. A breakthrough in this direction could potentially reconcile the low throughput and high fee issues attributed to Ethereum.

In addition to tossing out shortcomings like downtimes, censorship, and exploits borne out of the risky tradeoffs on security, EVM-compatible ZK L2s will go a long way in fostering crypto adoption. Currently, Ethereum has, in a sense, ceded execution to faster and cheaper layer-2 solutions. Following the successful merge, several teams, including Polygon, Scroll, ConsenSys, and Matter Labs, have taken steps towards materializing this goal. Still, delivering an optimal developer experience has been the biggest challenge in this path, though some practical implementations of the technology have been achieved. Last week, blockchain infrastructure firm ConsenSys released its zkEVM network for private beta testing in anticipation of user onboarding starting next month.

Ethereum co-founder Vitalik Buterin on the upcoming year

The series of industry-shaking events succeeding Terra's crash have reasonably led to disinclination to digital assets, especially among new entrants. Events of similar magnitude have been witnessed before, no doubt– Mt Gox in 2014 case in point – but none occurring in the thick of a predominantly red market. In a Dec 19 interview, Ethereum co-founder Vitalik Buterin shared his thoughts on the year and what is in store for Ethereum followers in the next.

Summing up his remarks that there is still an abundance of space for innovative minds to explore, Buterin identified three areas that could be rewarding in the long run in the converse with Bankless Show's David Hoffman. The first of the three he pointed out is the development of reliable wallet solutions, which is an opportunity for building teams and, at the same time, contributes to overall mass adoption. Buterin also recognized the modelling of a stablecoin unaffected by inflation which he envisioned as revolutionary in the sense of a lifeline for investors during such periods. Third, the programmer asserted that Ethereum needs to find applications in login-enabled systems to disrupt the internet scene that is at present controlled by big tech ‘overlords' like Google.

Stablecoin dominance chart. Source: TradingView

The growing dominance of stablecoins – three of the top 10 cryptocurrencies by market capital are stablecoins – albeit waning at present, didn't go unnoticed last month. On the contrary, the spotlight has been on these projects, which have registered average net monthly capital outflows of between $4 and $8 billion since March. Binance USD (BUSD), Tether (USDT) and USD Coin (USDC) contribute to a cumulative $128 billion market capital representing a share of roughly 15%. Stablecoin dominance peaked at nearly 20% shortly after the FTX debacle but has retreated slightly in line with the consolidating crypto market

No relief for miners

The narrative of miners' plight has also stayed consistent, even beyond the US. This week, Europe's previously attractive mining hubs in northern Norway and Sweden reported being in a crisis due to energy rates that have recently shot up to record highs. European miners in these regions are shutting down only a few months ago after setting up as the winter season arrives. The present electricity rates in northern Norway are averaging nearly four times the average rate of the previous three years, according to data from Nordpool, while in Sweden, prices are thrice as high now.

Historical development of electricity prices in Europe

The surging tariffs are partly because of seasonal change (low temperatures) that has raised the power demand. Less winds have limited power generation, as witnessed in Germany and the UK, while delays in maintenance activities in France, Sweden and Finland have increased the suffering. Kryptovault is one of the mining companies that have been compelled to power down its miners with hopes of resuming operations when conditions favor. Electricity rates will likely remain high in Southern Europe in 2023, but expectations are that the energy situation will look up, at least for northern Norway.

ASIC fleet count. Source: Glassnode

Now more than ever, the level of debt by Bitcoin miners is a key factor in determining which firms hold out the brunt of the bear market and the combined effects of a hostile environment. A Dec 23 report from Hashrate Index identified Core Scientific as the biggest debtor owing “$1.3 billion in liabilities on its balance sheet as of Sept 30”, followed by Marathon Digital. Combined, public miners have a hole of around $4 billion in liabilities – the bulk accounted by the top 10 debtors having a cumulative $2.6 billion debt.

Public mining firms liabilities. Source: Hashrate Index

Mining entities surviving on unfeasible leverage have burned out. Compute North and, more recently, Core Scientific have filed for Chapter 11 bankruptcy protection. Meanwhile, some have taken up acquiring mining sites from these distressed miners and assets selling at huge discounts.

In Canada, British Columbia followed the Quebec and Manitoba provinces in establishing restrictions on crypto mining to preserve electricity amid high demand. The minister of energy, mines and low carbon innovation, Josie Osborne, announced the suspension of new connections for Bitcoin miners to its grid. BC Hydro, a state-owned electric utility provider will not consider power requests from miners for the next 18 months. Existing mining firms and those locked to BC Hydro won't be affected.

Exchange headlines

Perhaps the most apparent shift after FTX's demise has been FUD followed by slightly increased market share gains by Binance, Coinbase and other exchange companies. Data compiled by The Block shows that Binance's market Share swelled from 59.92% in January to 78.43% at the time of writing despite anxiety around the price and designation of its BNB token. The exchange wrapped up November with $505.62 billion in monthly exchange volume accounting for an overwhelming 75.13% market share. The reported figure, however, represented a 45.74% decline compared to Nov 2021, when the exchange recorded a monthly volume of $931.83 billion.

Exchange trading volumes. Source: The Block

Coinbase and Kraken have seen similar slumps in trading volume accentuating the bear market. The duo's market share also improved across November from 9.23% and 3.83%, respectively, to 9.68% and 3.83% as of Dec 21. Outside market dominance, the exchanges' stocks have generally fared poorly. Coinbase's COIN symbol fell to a new all-time low of $33 on Dec 22, down from just over$250 on the first trading day of the year. Since going live, Coinbase's stock has shed 89% of its value, but that hasn't scared some investors. Last week, ARK Invest scooped a significant chuck of the exchange's shares (worth 11.9 million) alongside Tesla's as the latter fell to their yearly low.

Earlier this month, CEO Brian Armstrong posted in a tweet that the exchange is on the path of closing the year with a 50% slash in revenue compared to 2021 figures. The drop is consistent with projected year-end revenue numbers for many exchanges, as there has been notable aversion. Still, some have continued adding to their available tools to traders. This week, Kraken launched a Pro suite packing the “latest technology to reduce latency and handle peak demand” for market participants with advanced trading knowledge. The exchange reported that it would keep integrating new features into the Pro product whilst considering requests from clients. In a recent interview, WazirX VP Rajagopal Menon shed light on the dire state of affairs of Indian exchanges while acknowledging that some might fail to pass the test of survival. wishes you happy holidays.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.