An Assay of Crypto Models
The bear market prevalent in 2022 has called attention to crypto markets for adapting their business models. To talk about figures, the initial months of this year have been down 66.7 % for the period which is 75.4% from its all-time high. It was assessed that this year’s former months have had the worst semi-annual period in the history of the crypto market. The lion’s share of the negative performance occurred in the second quarter, mostly for crypto-market-specific reasons. In the first quarter, the market fell to only 7.8%, in defiance of the notion that the global macro environment necessitates the trading of crypto assets.
For decentralized lending platforms, it was seen that their modus operandi was normal, accelerating with the power of transparency and decentralized governance. The business models which contributed to the price drop this year include, play-to-earn, early adopter incentives, and algorithmic stablecoins. The crypto industry is based on network effects, wherein business practices that reward early adopters to get critical mass are necessary. One attribute that the financial market year has gained is the fragility of flight to quality, which typically happens in an unstable macro environment.
The Bitcoin network has been relatively old and has demonstrated security, so it is considered a safer business harbor while other business models are being confronted. Yet, the “flight to quality” factor over the Bitcoin network has been weak.
The Driving Force behind Markets
There are mainly five best-known market drivers, viz., adoption by users, investor fund flows, macro factors, technological trends, and regulation.
Adoption by Users
There has been a negative impact on user growth in certain sectors like DeFi and blockchain-based gaming, due to declining prices and market stressors, while user growth remained positively intact in other areas of the crypto ecosystem.
There has been an expansion in the bear market for using cryptocurrencies for payments. The top payment services like Visa, MasterCard, PayPal, etc., continue to develop their crypto payment services. To appeal to customer demands, these huge platforms are evolving to accept payment in crypto. Nevertheless, the net sum of entities moving towards Bitcoin usage has upsurge, even though the bear-market transaction volume was relatively lower.
It’s a noteworthy remark that even in such difficult times, Web3 services have continued to expand. Certain case-clauses have strengthened the framework of decentralized money, like the central bank printing trillions in order to avoid recession and then the probable recession to fight inflation, which has helped to keep it strong even in massive price falls.
Investor Fund Flows
A few notable banks and asset managers like Goldman Sachs, JP Morgon, Fidelity, Black Rock, etc., strive to give out optimistic affirmations about the medium-to-long-term outlook for the crypto market. They even keep up with hiring, investing, and building up the crypto domain.
In the macro environment, the only way to preserve value is through investments in durable physical assets, industries, or projects involving real growth.
In the same year, the second quarter accounted for a one-third decline in crypto venture capital investments, as compared to the first quarter. Regardless of job cuts at some crypto-related organizations, the need, and demand for application developers, data scientists, engineers, full stack developers et al, remains prominent among crypto industries. This factor induces technological innovation and helps it to move forward with time.
The latest crypto market crisis has given rise to regulators’ increased focus on providing clarity, which comprises finalizing and enacting bills on crypto assets regulation. One of the major spotlights for the regulators is the stablecoins, which henceforth is a consequence of the TerraUSD stablecoin’s collapse. This concluded on the note that a regulatory clampdown cannot be unexpected.
We’ll be discussing a few market segments like the protocol layer, applications, and a few more, in the upcoming section.
The Protocol Layer
Ethereum has recently upgraded its consensus mechanism to “Proof-of-Stake”, which is now being considered a huge step in the blockchain protocol sector. It has put the two substantial cryptocurrencies in a different light in the sense of energy consumption, the debate about centralization, and other regulators’ concerns.
This upgrade came to be known by the name ‘The Merge’. It resulted in the price of ether being doubled in July 2022. Ever since its announcement, sentiment following ‘The Merge’ has been very vigilant towards any adversaries and potential problems to occur in the initial stages. Even so, on the other hand, Ethereum’s high transaction fees and scalability barrier have given it a chance to other platforms to pull some of Ethereum’s market share. Nonetheless, Ethereum still leads the smart contract platform space, accounting for over two-thirds of the Total Value Locked (TVL) in decentralized finance and almost 85% of the value of NFT transactions.
Besides, Solana is now challenging Ethereum. It is processing an almost identical number of transactions, with Ethereum, though being 10% of the value. There’s a robust team of developers who are devoted to improving the network and innovation aspects of Solana. They’re planning to launch a mobile platform with a software kit to develop mobile Web3.0applications, and the development of smartphones altogether.
Many of the application sectors, impassive of the crypto market-specific events, have maintained to enhance their user bases. The application sector merely accounts for less than 5% of the aggregate crypto market capitalization. This is the only sector that illustrates medium-to-long-term growth opportunities.
1. Decentralized Finance (DeFi)
In the months of May and June (2022), the DeFi protocols dropped by two-thirds in the total value locked (TVL). Yet the sector continues to flourish and operate normally, being unmoved by the solvency crisis surrounding the Centralized Finance (CeFi) sector. Volume dropped by 25% over decentralized exchanges.
2. Web 3.0
There was strong user growth over projects establishing decentralized and user-controlled versions of the internet, like decentralized data storage providers Filecoin and Arweave, and decentralized wireless provider Helium.
The best-known model in the gaming sector is the play-to-earn model which is being adopted at an early rate and has shown success previously. However, in the bear-market arena, the play-to-earn concept is seriously being challenged. The gaming sector overall receives the largest investments that count for about one-third of the crypto venture capital flow.
This year’s metaverse performance lacks progress. The reason for the same is, the under-construction of the idea, where experience is mostly overlapped with gaming. Even certain privacy concerns are to be taken through tech giants so as to avoid any unethical means of the data breach.
Additional Market Segments
More market segments include dollar stablecoins, CeFi, NFT art and collectibles, and asset tokenization. Stablecoins still hold an arresting position in the market, majorly due to their algorithm. Recently, Tether has been drawing attention due to its trading, however, it lost about 20% of its capitalization. Another competitor here is USD Coins, whose market capitalization grew and ultimately became very close to Tether.
The Centralized Finance (CeFi) comprises traditional institutions that are active in the crypto market with tokens in issue that offer participation in the corporations’ revenues/profits or offer discounts. The tokens that have recently outperformed the market strategy include, FTX, Binance, and Bitfinex.
The NFT market segment has held up really well. The first half witnessed the highest sales volume, along with a 50% higher number of transactions. CryptoPunks floor prices have recovered since the price drop in June, while the Bored Ape Yacht Club floor prices still trade 25% above the levels at the opening of the year. There has also been a recent surge in the asset tokenization of software sales.
The Venture Capital
The venture capital slowed down in the second quarter of 2022, however, it was still the third strongest on record. Moreover, the aggregate volumes for the first half of 2022 also exceeded the second half of 2021. In the aspect of crypto, it has been producing unicorns at roughly twice the rate of other VC sectors. In figures, crypto VC accounted for 4.6% of all VC investments in 2021 but 7.8% of all unicorns. As of now, the robust and well-funded crypto venture capital industries have the tendency to experience downturns, and also to experience new opportunities.