Crypto market update From "Flight-to-quality" to "Flight-to-growth" - SYGNUM.COM
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Crypto market
update
From “Flight-to-quality” to “Flight-to-growth”
SYGNUM.COM
1 Crypto market update | Q4 2022
Table of contents Overview 3 Crypto business models will evolve 3 Market drivers 4 User adoption 4 Investor fund flows 4 Macro factors 4 Technology trends 5 Regulation 5 Market segments 6 Protocol layer 6 Applications 6 Decentralised Finance (DeFi) 7 Web 3.0 7 Gaming 7 Metaverse 7 Other market segments 8 Venture capital 9 In the “prime zone” for building the next unicorns 9 2 Crypto market update | Q4 2022
Overview
Crypto business models will evolve
The prevailing bear market has highlighted that Decentralised lending platforms, on the other hand, continued
some sectors of the crypto market need to adapt operating as normal, demonstrating the power of transparency
and of decentralised governance.
their business models. Fundamentals overall,
however, are supportive for strong medium-term The vulnerabilities of certain experimental business models such as
performance. play-to-earn, early adopter incentives and algorithmic stablecoins
were another contributing factor to the recent price drops this year.
Experimentation with these models is both legitimate and useful,
Since the second half of 2011 – when the total crypto market
and we believe that criticising them for not getting it 100-percent
capitalisation was below USD 100 million – the first half of this year has
right from the outset is unreasonable.
been the worst semi-annual period in the history of the crypto market,
down 66.7 percent for the period and 75.4 percent from its all-time Business practices that reward early adopters to get to critical mass
high. Since then the market has been moving sideways, held back by quickly are legitimate and often necessary in an industry such as
pervasive negative sentiment. crypto where network effects are critical to success. It is important,
however, that projects deliver and demonstrate genuine value to users
It is interesting to note that the vast majority of the negative
beyond the incentives, and have a reasonable plan for phasing them
performance occurred in the second quarter and largely for crypto-
out. Without this, greed can turn legitimate projects into de facto Ponzi
market specific reasons. Despite the narrative that the global macro
schemes, even if they were not intended as such.
environment necessitates the selling of crypto assets, the market only
fell 7.8 percent in the first quarter. However, after the collapse of Terra Another interesting feature of the financial markets year-to-date has
and the daisy-chain failures of centralised crypto lenders, crypto asset been the weakness of “flight to quality” flows that normally occur in
prices dropped significantly. unstable macro environments. Not only did bonds fail to protect the
40/60 portfolios, but gold is down almost -20% from the high after the
Despite short-term knee-jerk correlation with major asset classes, the
start of the Ukraine war, and silver down more than -25%. The Swiss
big moves in crypto are still primarily driven by idiosyncratic, crypto-
franc has weakened 5-10% vs the dollar year-to-date (although it is
market-specific developments, both on the downside and the upside.
outperforming the other major Western currencies such as the Pound,
Euro or Yen).
S&P BROAD CRYPTO MARKET INDEX
Within the crypto market, the relative longevity and demonstrated
(USD trillion)
security of the Bitcoin network means that many regard it as a relative
5,000
safe haven when the business models of other platforms are being
4,500
challenged. However, this time the usual “flight to quality” effect of
4,000
3,500
Bitcoin outperforming has been weak. Bitcoin only outperformed by
3,000
a few percent, and its dominance has not risen – indeed it is slightly
2,500 below the level at the start of the year.
2,000
In an environment of recession coupled with inflation, investing in
1,500
1,000
organic growth trends offers the best opportunities. The Fed may lurch
500 back and forth between fighting inflation and fighting the recession,
0 creating a pump and dump effect on the financial markets but this will
not do much to solve the underlying structural problems of food and
January February March April May June July August September
2022 2022 2022 2022 2022 2022 2022 2022 2022 energy shortages (with the latter likely to translate into shortages of
other products), wasteful fiscal spending and over-indebtedness of
S&P Broad Crypto Market Index Source:
S&P Dow Jones Indices, both the private and public sectors.
Macro events (Ukraine war, Fed rate hikes, Jackson Hole) Sygnum Bank
Crypto market events (Terra collapse, CeFi lending crisis, While it is a safe bet that on a Fed pump, crypto will be a strong
Ethereum Merge date annouced)
outperformer, for a sustainable rally we would need to see a “flight to
growth” narrative emerging on the macro level, and/or the narratives
The crypto market failures over the last few months were mainly in the crypto market refocusing on crypto specific developments.
caused by centralised entities (private companies) active in the
Certain sectors of the crypto market need to regain trust or adapt
crypto market that were either unregulated or loosely regulated, or in
their business models, however, we see a number of supporting
some cases, that misled their regulator. Surprises were sprung in the
fundamentals for the overall market. These include continued and
centralised finance (CeFi) sector when it became apparent that several
largely recession-proof growth trends within crypto, very cheap
CeFi entities had very poor risk management and, in some cases,
valuations, the undiminished build-up of large institutions’ crypto
questionable business practices.
operations, a broadly supportive approach by regulators, and further
innovation driven both by plentiful venture capital and the pressures
and challenges of the recent months.
3 Crypto market update | Q4 2022Market drivers
User adoption Investor fund flows
Although declining prices and market stressors have The bearish trend in crypto has not slowed the
negatively impacted user growth in some sectors interest from major financial institutions to enter
such as DeFi (Decentralised finance) and blockchain the crypto market and/or grow their presence.
based gaming, user growth continued in other areas
of the crypto ecosystem, even in the face of the bear Many major banks and asset managers such as Goldman Sachs,
market. Meanwhile, the consensus – which we share JPMorgan, Fidelity, BlackRock continue making positive statements
about the medium-to-long-term growth outlook for about the medium to long-term outlook for the crypto market,
the technology – remains intact. and continue to invest, hire and build. As with payment providers,
they reference strong customer demand as the driver.
The build-out for using cryptocurrencies in payments has continued
throughout the bear market. Major payment service providers such GOLDMAN SACHS CLIENT CRYPTO EXPOSURE SURVEY
as Visa, MasterCard, American Express, PayPal and Stripe are all 70%
continuing to build their cryptocurrency payment services offering.
60%
Several studies of merchants and retailers found that many of them
intend to accept crypto payments (a recent US study from Deloitte 50%
found this to be 75 percent), citing customer demand.
40%
Despite the bear-market-related lower transaction volumes, the net
30%
number of entities using Bitcoin has continued to grow.
20%
SHARE OF GLOBAL POPULATION USING BITCOIN 10%
0.40%
0%
0.35%
2021 2022 Expected to
0.30% increase exposure
0.25% Source:
Goldman Sachs Digital Assets Survey
0.20%
0.15%
0.10% Macro factors
0.05%
In an environment of inflation, rising rates and
0.00%
recessionary trends, investments in durable physical
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 assets and companies or projects with real growth
are the only way to preserve value.
Share of global population using Bitcoin Source:
Blockware Solutions
The current macro environment is fundamentally negative for most
Central banks’ actions over the last two years, printing trillions to avoid assets. Negative real rates mean that cash only provides the illusion
a recession and then likely causing a recession to fight the inflation of value preservation. Meanwhile rising rates hurt leveraged
this caused, have strengthened the narratives of decentralised money companies, real estate and bonds. Indeed, government bond
despite the steep price falls. Unlike during the 2018-2019 crypto portfolios have seen a drawdown of “black swan” magnitudes recently,
winter, the share of long-term Bitcoin holders reached an all-time high, shocking 60/40 balanced portfolios. When it comes to productive
signalling continued confidence in Bitcoin as a long-term store of value. assets, a recession hurts earnings and increases defaults except for
recession-proof sectors and companies – which are the relative safe
Although sectors where business models have been challenged have,
havens preserving value.
for now, seen a reversal in user growth, other application sectors such
as Web3 continued to grow their user bases even during the difficult Real rates are currently in strongly negative territory, even when using
second quarter. the official CPI figures which understate the true extent of price rises.
4 Crypto market update | Q4 2022ONE YEAR TREASURY YIELDS MINUS CPI Regulation
5.0%
4.0% Possibly the most supportive short-term
3.0%
2.0%
development coming out of the recent crypto
1.0% market crisis is the regulators’ increased focus
0.0%
on providing clarity.
-1.0%
-2.0%
-3.0%
-4.0%
Most Western regulators have expressed a greater sense of urgency
-5.0% to finalise and enact bills on crypto asset regulation. The tone of
-6.0%
the communication from most regulators and lawmakers has been
increasingly positive – and not just from long-term supporters of
2022*
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crypto, but also previously sceptical voices such as the Bank of
One year treasury yields minus CPI Source: England. According to the Deputy Governor of the Bank of England,
FRED, Federal Reserve Bank
of St. Louis, Minneapolis Fed Jon Cunliffe “whatever happens over the next few months to crypto
assets, I expect crypto technology and finance to continue… It has the
Valuations in the traditional asset classes have improved after the selloff possibility of huge efficiencies and changes in market structure”.
year-to-date, but neither bonds nor equities are cheap. Meanwhile,
The Fed's Vice Chair, Lael Brainard, expressed similar views:
although there isn’t consensus yet about how to value crypto assets,
“Far from stifling innovation, strong regulatory guardrails will help
various valuation approaches all point to the asset class being very
enable investors and developers to build a resilient digital native
significantly undervalued.
financial infrastructure.”
With stablecoins being one of the key areas of focus for regulators,
Technology trends and especially so in the wake of the TerraUSD stablecoin’s collapse,
the market capitalisation of stablecoins provides a signal that
Bear markets in crypto have always proven to be the a regulatory clampdown is not expected. Other than the loss of
most fertile periods of innovation as strong projects approx USD 20 billion in TerraUSD’s market capitalisation, the total
sought to overcome the challenges that had limited capitalisation of stablecoins has only declined by a further USD 10
their growth and success. We expect the current bear billion from over USD 180 billion in April.
market to have the same positive effect, a move made
easier by the plentiful availability of venture capital. STABLECOIN MARKET CAPITALISATION
(USD BILLION)
190
Even though crypto venture capital investments declined by a third in
the second quarter versus the first quarter, they are still up 25 percent 180
year on year versus the second quarter of 2021, and the second quarter
was the fourth strongest quarter ever on record. 170
160
CRYPTO VENTURE FUNDING
(USD BILLION) 150
14 140
12
January February March April May June July
2022 2022 2022 2022 2022 2022 2022
10
Stablecoin market capitalisation Source: CoinMarketCap, Sygnum Bank
8
6
4
2
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2019 2020 2021 2022
Crypto venture funding Source: The Block
In addition, despite job cuts at some crypto related companies, the
demand for application developers, data engineers and full stack
developers remains very high among crypto businesses, supporting
technological innovation going forward.
5 Crypto market update | Q4 2022Market segments
Protocol layer
Ethereum’s upgrade to the Proof-of-Stake consensus Meanwhile, Solana’s teething problems of recurring outages and bugs
mechanism is a pivotal development in the are reminiscent of bugs and hacks marring the early days of Ethereum.
blockchain protocol sector, putting the two largest A strong developer team is committed to improving the Solana network
and innovating fast, including the launch of a mobile platform with a
cryptocurrencies on a different path in terms of
software kit to develop mobile Web 3.0 applications and the development
energy consumption, narratives from regulators
of a smartphone. Other leading blockchain protocols such as Avalanche
and debate about centralisation.
and NEAR continue to build and innovate.
After rolling delays of the Ethereum upgrade (the “Merge”), the price
of ether doubled on the announcement of the Merge date in July. Since Applications
then, sentiment leading up to as well as following the Merge has been
cautious to negative, with concerns about potential problems in the early Some application sectors have continued to grow
days and weeks following the Merge. If problems are avoided or resolved, their user bases, largely unaffected by the global
a relief rally into year end is likely, and Ethereum potentially “flipping” macro developments or the crypto market specific
Bitcoin will be a hot topic again. events. Some have seen their business models
At the same time, Ethereum’s high transaction fees and scalability issues
challenged and need to innovate; others must
have created an opportunity over the past two years for other platforms rebuild trust.
to take some of Ethereum's market share. Until Ethereum's scalability
significantly improves when the next phase of the upgrade goes live, Application sectors still only account for less than five percent of
(scheduled for the end of 2023), other chains have the chance to attract the aggregate crypto market capitalisation. As the still early stage
projects and build critical mass. blockchain technology continues to identify and build out real-world
use cases, application sectors represent the greatest medium-to-
Nonetheless, despite the erosion of its market share from complete
long-term growth opportunities.
dominance (around 95 percent in 2020), Ethereum continues to
dominate the smart contract platform space, with a leading market
share across most application sectors – accounting for two thirds of the
Total Value Locked (TVL) in decentralised finance and approximately 85
percent of the value of NFT transactions. Solana
Ethereum is Ethereum’s
BSC strongest
Tron
challenger in NFTs, processing almost theAvalanche
same number of transactions
Solana Polygon
year-to-date, although only 10 percent of the value. Recently its
Cronos Fantom Waves
transaction count has been a multiple of Ethereum’s, with the value
Arbitrum Parallel Mixin
approaching 25% of Ethereum’s.
DefiChain Optimism Others
DEFI MARKET SHARE NFT MARKET SHARE
OF PROTOCOLS OF PROTOCOLS
Ethereum BSC Tron Ethereum Solana BNB
Avalanche Solana Polygon Flow Panini Ronin
Cronos Fantom Waves Others
Arbitrum Parallel Mixin
Source:
DefiChain Optimism Others DefiLlama, CryptoSlam, Sygnum Bank
6 Crypto market update | Q4 2022Decentralised Finance (DeFi) Gaming
Although the events of May and June saw the total The play-to-earn concept has been seriously
valued locked (TVL) in DeFi protocols drop by two challenged by the bear market, and the crypto
thirds, the DeFi sector continued to operate as gaming sector needs to improve both the economic
normal, largely unaffected by the solvency crisis models and the gaming experience. The USD 600
enveloping the Centralised Finance (CeFi) sector. million hack earlier in the year affecting market
leader Axie Infinity dealt a further blow.
The decline in TVL also reflected the fall in demand for borrowing as the
over-collateralised loans most DeFi platforms offer were largely used The play-to-earn model for building fast adoption was one of the great
for leverage, and the lower demand drove yields down as shown by the success stories of the previous year. However, the transition to a stable
example below. Volume on decentralised exchanges also dropped by business model where more users pay-to-play (directly or indirectly such
over 25 percent. as through the purchase of in game items) has not happened, and as
soon as token prices started to fall, the number of users dropped off. Axie
LENDING RATES Infinity lost 75% of its monthly active users year-to-date, and while some
5.0%
games took market share from Axie Infinity, the total number of active
4.5% users in the blockchain gaming sector declined.
4.0%
3.5% The fundamental idea of blockchain-based gaming where players
3.0% own the assets – enabling a shift in power from gaming companies to
2.5%
players – remains valid. But the gaming experience needs to improve
2.0%
1.5% significantly for the projects to not rely on token price appreciation to
1.0% attract users. The involvement of mainstream game developers (such as
0.5%
Square Enix selling the Tomb Raider franchise – among others – to invest
0.0%
in blockchain based gaming) can make the difference.
January February March April May June July
2022 2022 2022 2022 2022 2022 2022 Meanwhile the gaming sector continues to receive large investments,
Borrowing rate Lending rate Source: Compound accounting for about a third of crypto venture capital flows year-to-date.
The significant venture funding into blockchain based gaming over the
Maple Finance is innovating in the area of undercollateralised loans past 1.5 years will deliver improved games over the next 1.5 years.
where the liquidity providers to the platform accept credit risk on
borrowers. It is possible that borrowers default, however, liquidity
providers to the lending pools have complete transparency into the Metaverse
pool and they choose to take the credit risk. This is quite different from
There is no slowdown in the development of
a centralised lender taking deposits and then taking risks with the funds
the metaverse. Celebrities and corporations
that the depositors are unaware of.
continue establishing their presence. However, the
The recent crisis has shown the power of the transparency and metaverse is still mostly an idea that doesn’t yet
decentralised governance of DeFi platforms and as the market offer experiences that appeal and the slowdown in
stabilises, volumes will recover.
the gaming sector has affected the performance of
metaverse projects due to the currently large overlap.
Web 3.0
After last year’s exceptional outperformance, metaverse projects have
Many Web3 projects have continued to grow their underperformed year-to-date.
user bases, largely untouched by either the negative
However, as interest in the metaverse continues to grow, virtual world
macro environment or crypto specific crises.
related NFT sales increased even during the bear market, growing by
25% in sales count from Q1 to Q2 and almost doubling in dollar value.
Projects in the sector building the new decentralised and user-controlled
Significant investment and development activity continues in this
version of the internet, such as decentralised data storage providers
sector, and although there is a strong current overlap with gaming,
Filecoin or Arweave or decentralised wireless provider Helium, continued
there are many other potential use cases. Despite corporations
to see strong user growth. The Twitter acquisition debacle which
such as Meta investing very heavily, privacy concerns and Big Tech’s
highlighted further glaring weaknesses of the company has reinvigorated
unethical practices of late mean that a decentralised metaverse may
interest in developing decentralised social media platforms.
hold more appeal.
7 Crypto market update | Q4 2022Other market segments 8 Crypto market update | Q4 2022
Venture capital
In the “prime zone” for building the next unicorns
Although crypto venture funding declined in the
second quarter, and the rate of failure among
VC funded projects is likely to increase over the
short-term, the net effect of the downturn in
the crypto markets on the crypto VC landscape
will be positive.
Despite the slowdown in venture investments in the second quarter, Some of the new VC entrants ended up with less competitive deals at
the quarter was still the third strongest on record, and aggregate volumes often historically high valuations and may not have exercised a high
for the first half of the year exceed the extremely bullish, record breaking level of due diligence. While the downturn will cause weaker projects
period of the second half of 2021. July and August saw lower volumes, to fail, the economics for crypto VC investments have improved as
with both months below $2bn vs the $3-4bn monthly flows we have seen previously stretched valuations have become more attractive, and
for most of the past year. the balance of power shifted back towards investors and away from
fighting for access to deals.
Crypto venture capital has been producing unicorns at approximately
twice the rate of other VC sectors: crypto VC accounted for 4.6 percent of Bear markets have historically been a fertile ground for VC investing
all VC investment in 2021 but 7.8 percent of all unicorns. Not surprisingly, because the demand for innovation to address bottlenecks and
money is still flowing into the crypto VC space and new VC funds impediments is strong, it is easier to hire talent, the pressures of the
launches are met with strong demand. For example, the largest ever bear market encourage focus, endeavour and financial discipline and
crypto venture fund yet was launched in May, raising USD 4.5 billion. the entry points for investors are lower. The bear market of 2014-5
spawned tremendous innovation, including projects like Ethereum
Many new VC firms that jumped on the bandwagon of crypto venture
and the Crypto Winter of 2018-9 was the period when dozens of the
as the sector was grabbing headlines harvesting the batch of unicorns
2021 unicorns were seeded.
created during the previous bear market.
Strong, well-funded crypto venture capital companies welcome
downturns and most of them are excited about the current opportunities.
Prime zone where the next ‘Harvest’ zone
unicorns are founded, for the patient
built and scaled capital VCs
1 1 1 0 1 0 1 0 0 0 1 5 9 13 13
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2018 2019 2020 2021 2022 2023 2024
Source: CB Insights
Report sources:
1. On chain data 5. DappRadar 9. Deloitte report referenced: “Merchants
2. S&P Broad Crypto Market Index 6. NFTPriceFloor getting ready for crypto Merchant
3. DefiLlama 7. NFTGO Adoption of Digital Currency Payments”,
4. DeFiprime.com 8. All token price performance referenced survey prepared in collaboration with
is based on using price data from Paypal
CoinMarketCap
Disclaimer: This document is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is
it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains
the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment
or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the
document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and
analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information
indicated herein may change without notice.
9 Crypto market update | Q4 2022Trust. Technology. Together
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