The recent flurry of bad news streaming out of the cryptocurrency sector has cast a pall over the entire blockchain industry. A whirlwind of high-profile crypto firm liquidations has wiped out billions in market value from the industry and sent the market to the coldest winters.
Taken from the BTC/USD Chart, 1 Year chart: https://coinmarketcap.com/currencies/bitcoin/
Bitcoin, the world’s most popular cryptocurrency, has lost over 70% of its value from its November 2021 highs of $66,000 and is selling at lows of $20,000. Ethereum, the second largest cryptocurrency by market cap, also underwent a mega price correction. It has lost over 70% of its value to retail at the $1000 range from its $4,800 highs in November 2021. The entire crypto sector market value has also plunged from its former $3.2 trillion to an average $1.04 trillion market cap. As a result, there has been a flight of liquidity from the market.
Updates on crypto news and crypto markets
The implosions of firms such as Terraform Labs and Celsius have fueled the cold of the bear market, but the sector began to lose ground in late 2021. The sector’s downward spiral tracks the Dow Jones Industrial Average and the S&P 500.
The phenomenon kicked off at the end of 2021, as the Federal Reserve’s aggressive monetary tightening policy began to spook the markets. As a result, investors that grew accustomed to consistent gains in risk assets such as cryptocurrencies began to move liquidity to safe havens such as gold, government bonds, the US dollar, and defensive stocks.
The war in Ukraine and surging inflation coupled with a 0.75 percentage points Fed interest rate hike in June have intensified the bear market. As a result, lenders are earning higher returns on safe assets.
That said, the internal turmoil in the blockchain sector has had more adverse effects on its valuation. It all began, with the dramatic crash of the Terra network in May 2022, due to a bank run event. Terra’s collapse triggered a chain of events that led to the demise of other blockchain firms such as Celsius Networks.
Celsius, first halted its withdrawals, transfers, and swaps in early June. The crypto lending platform first cited “extreme market conditions” as the cause of its liquidity problems. However, it turns out that overexposure to Staked Ether (stETH) on the Lido platform was the genesis of the Celsius Networks problems. Lido is a blockchain liquid staking protocol.
Lido issues stETH for staked Ether. So, stETH is a derivative asset or an IOU, redeemable fully for ETH. Unfortunately, many DeFi platforms accept stETH as collateral to borrow ETH, and its unrestricted use in ultra-volatile markets has created liquidity risks.
stETH values decoupled from ETH following the TerraUST implosion as ETH holders raced for the exit. Celsius, then channeled investor ETH into Lido and was left holding an undercollateralized stETH bag.
Likewise, billion-dollar crypto hedge fund, Three Arrows Capital (3AC), has filed for bankruptcy after failing to meet its lender’s margin calls. Three Arrows Capital vaults held over $10 billion worth of crypto assets by March 2022.
Its insolvency has triggered a domino effect that could drown a lengthy list of counterparts. Some centralized crypto derivatives, lending, and exchanges in the red due to concentrated bets in 3AC include Blockchain.com, Voyager Digital, BitMEX, and FTX.
How these events affect the blockchain businesses in the crypto market
These events have led to significant drops in blockchain sector VC funding. Blockchain venture funding fell by 38% to $4.219 billion in May 2022. A month earlier, VC funds had channeled 6.829 billion into the sector.
VC-backed blockchain funding for the year’s first half rests at $9.3 billion, a much lower figure than 2021’s $12.5 billion levels. In addition, the blockchain-based gaming and NFT markets have also taken a hit as speculators’ feet grow cold over the market’s turmoil.
What investors should consider doing in this market
Crypto downturns are not a new phenomenon and the industry. Bear markets cleanse the noise and highlight use cases with real-world utility and high sustainability metrics. As an illustration, new users are joining the decentralized finance market platforms despite falling crypto prices, per Glassnode data.
Decentralized platforms such as Uniswap, Aave, and MakerDAO function fluidly despite extensive sell-offs and loan liquidations. Moreso, decentralized stablecoins such as DAI have held their dollar pegs through most of the downturn.
Centralized stablecoins such as Tether (USDT) and USD Coin (USDC) have also kept their $1.00 to the USD majority of the time. These successes prove that the DeFi sector’s stringent loan collateral policies can ward off debt bubbles that have caused failure in the aforementioned centralized platforms.
The savvy investor should therefore take advantage of the bear market and invest in decentralized platforms that have shown a rise in activity and fees, despite cold market conditions. In addition, innovations in DeFi 3.0 are also easing blockchain investing for the ordinary person and enhancing the sector’s security, transparency, and capital efficiency.
Taken from EDNS Opensea NFT Marketplace https://opensea.io/collection/edns
How EDNS is coping with the crypto markets
Decentralized domain name protocols and extension mechanisms for DNS (EDNS) are sustainable use cases that have also enjoyed growth despite the bear market trend in the larger blockchain sector.
There has been a spike in decentralized domain name sales as retail investors embrace that a domain name is an investment. Easily readable and memorable domain names are excellent marketing and branding tools and can sell for a profit as the EDNS hype continues to gather momentum.