CoinMarketCap Market Pulse April 2023
CMC Research

CoinMarketCap Market Pulse April 2023

10 months ago

Is the crypto bull market back? CoinMarketCap looks at what the data indicates Q1 -> Q2 2023

CoinMarketCap Market Pulse April 2023
Q1 2023 was an eventful quarter for crypto, marked by high volatility due to a low liquidity environment post-FTX, coupled with a range of factors including regulatory crackdowns, ongoing uncertainty regarding the pace of inflation, and concerns about the stability of the banking system. While the former were largely anticipated, the latter caught many off-guard and - following the bank bailouts - put Bitcoin under the spotlight.

Not only did Bitcoin enter the spotlight, but its value proposition arguably became more tangible than ever amid emerging hyper-narratives around topics such as de-dollarization and hyperinflation. As a result, Bitcoin outperformed most altcoins, with capital seemingly flowing towards its relative safety and away from altcoins, NFTs, and potentially even fiat and fiat-backed stablecoins.

Meanwhile, Ether has also fared well but underperformed relative to Bitcoin despite achieving net deflation of around -0.25% this quarter. Ether's underperformance may be due to apprehension regarding the unlocking of staked Ether or simply due to the strength and topicality of Bitcoin's narrative. A weak NFT market (despite a riveting battle for supremacy between Blur and OpenSea) did little to help Ether's cause. Earlier in the quarter, we saw a slew of mini-narratives (AI, zero-knowledge, China) that came one after the other in quick succession but faded post-bailout. In what follows we explore Q1 2023 in 17 charts covering Bitcoin, Ethereum, stablecoins, NFTs, L1s, L2s, DEX, CEX, and options volume.

Total stablecoin supply started the quarter at $138B, about $4B down from where it was at the start of the previous quarter, and $25B down from its ATH of around $180B achieved from March to May 2022, just before Terra’s collapse

After stablecoin supply appeared to be stabilizing at around $140B a couple of months after Terra’s collapse, in November 2022 another black-swan, FTX, sent the stablecoin supply on a slight but steady downtrend. The steady contraction in stablecoin supply is likely attributable, at least in part, to participants losing faith in the market and/or anticipating strong regulatory headwinds in the wake of FTX’s implosion

Interestingly, the downtrend has extended into Q1 2023 at roughly the same rate despite more positive price action; these continued capital outflows can be attributed to apprehension regarding future regulatory actions as Q1 2023 saw increased hostility from regulators. The recent displays of the fragility of the banking system — which triggered bank runs, depeggings, and hyperinflationary concerns — may also have contributed to the decrease in stablecoin supply, as some market participants may prefer to park their capital in BTC or ETH instead of stables. While the downtrend is somewhat alarming, note that the total stablecoin supply is still 4.5 times higher than it was in Dec 2020 when BTC was at current price levels, meaning there is substantially more capital waiting to be deployed than there was at the onset of the previous bull run.

USDC supply contracted slightly from $41B to $37B following its short-lived depeg event in the wake of the collapse of Silicon Valley Bank (SVB). Surprisingly, it continued to contract steadily after the crisis was resolved, ending the quarter at $31B. Most likely, this is the result of investors de-risking from projects exposed to U.S. banks and U.S. regulatory risk. It’s also possible that Circle's delayed response to the SVB collapse, despite public knowledge of their SVB connection, has contributed to the supply contraction, shaking investor confidence. In the same timeframe USDT went from a supply of $73B to $80B, gaining significant market share from USDC because of its lower exposure to the US banking system. BUSD also shrank significantly this quarter — from $16B before news broke on February 12 that the SEC saw BUSD as an unregistered security and intended to sue stablecoin issuer Paxos — to $7.5B at the end of the quarter. The supply of BUSD could only go down in fact, as following the news of SEC's intentions, Paxos announced it would stop minting new BUSD tokens. In addition, Binance ended zero-fee trading for BUSD-listed trading pairs on March 22, moving them over to TUSD-listed pairs instead.

Coming into Q1 2023, Blur and OpenSea were roughly matched in terms of their share of Ethereum-based NFT trading volume. Blur dipped slightly below 40% as they delayed their airdrop but recovered and gained new ground as the airdrop date drew closer. Unlike past OpenSea contenders LooksRare and X2Y2, Blur designed their token incentives in a way that makes it difficult to game the system without taking actual risk. Thus, well after their latest airdrop, Blur continues to remain in a strong position, controlling 70% of NFT trading volume. This continues to force OpenSea into a defensive position, as the two players engage in an all-out war that presents a fascinating case study in applied game theory, particularly as pertaining to royalties and competitor blacklisting incentives.

OpenSea still retains a comfortable lead in terms of the number of active users; for instance, in March 2023 they registered over 3 times as many unique buyers as Blur. However, Blur captures a disproportionate share of NFT whales due to its perceived superior product: the top 1% of Blur users generate seventy percent of the total volume on Blur while the top 1% of OpenSea users only account for 20% of the platform’s volume. Recently, OpenSea unveiled a Pro version of their platform in an attempt to claw back power users from Blur.

Blur incentives could arguably undermine NFT prices, as rewards are doled out to bidders in proportion to the duration that the bid is open (as well as how close the bid is to the top bid); this theoretically incentives market participants to coordinate to collectively “lowball” their bids in order to maximize rewards and minimize risk.

Nevertheless, this design increases the difficulty of manipulating the system through wash trading, thereby ensuring that the incentives offered by Blur predominantly lead to genuine trading activity. This can benefit NFT holders by making their assets more liquid and, in theory, potentially create a positive feedback loop whereby Blur incentives lead to a more liquid NFT market, which increases the value of NFTs, which then drives more volume to Blur and increases the value of its token, which further creates more liquidity in the NFT market.

Ethereum’s Shanghai + Capella (Shapella) upgrade took place on April 12, enabling staked Ether withdrawals for the first time. The amount of ETH staked in the ETH2 staking contract had been rising at a mostly steady rate for over two years, ending the quarter at just under 18M ETH deposited. After the upgrade, the amount can theoretically decrease for the first time, though it might actually increase long-term as staking becomes less of a long-term commitment.

In terms of staking providers, Kraken got in trouble with the SEC over its staking-as-a-service program and agreed to pay a $30M settlement fee; Coinbase might also be in hot water over its staking program, as it received a Wells notice from the SEC which typically results in a lawsuit. Despite these significant events, not much has changed in the distribution of staked ETH among staking providers. Lido continues to hold almost one-third of all staked ETH, which it delegates to multiple node operators. There was a slight uptick in the amount of Lido staked ETH, although it was not connected to either the Kraken or Coinbase news but rather to Justin Sun’s large deposits.

ETH’s underperformance relative to BTC throughout Q1 2023 could be partially due to the perceived looming threat of withdrawals, with some fearing substantial selling pressure as $34B worth of Ether becomes unlocked. Such concerns are likely overblown, as liquid staking protocols, which account for a substantial portion of all staked ETH, have likely absorbed a big chunk of the demand to “unlock” staked ETH. In addition, there is a withdrawal queue system that makes it such that the full amount of staked ETH would take months to withdraw. It’s also worth noting that many stakers are either still in the red relative to the price at which they staked, or are ETH-aligned and hold a long-term view, and thus potentially less likely to sell. Finally, the Shapella upgrade ultimately makes staking more attractive, which could likely cause inflows of ETH to exceed outflows and eventually result in 2-3x more ETH being staked (judging from staking percentages of 30-50% on other proof-of-stake blockchains versus 15% on Ethereum currently).

Note: chart x-axis units normalized to one for comparison between indexes

Q1 2023 saw the crypto market rise out of the slump it found itself in for the largest part of last quarter, in spite of ongoing macroeconomic and regulatory headwinds; with this rise came a series of mini-narratives succeeding each other in rapid fashion.

Altcoins were the first to pump, with AI-related coins leading the way, fueled by immense interest in OpenAI’s large language model released at the end of 2022. BTC rose as well, further fueling the AI narrative, with the market cap of AI coins (AGIX, FET, ALI, NMR, SDAO, VTX, DBC used to represent the AI sector is by no means exhaustive) seeing an explosive growth of almost 250% over the course of 5 days. As AI coins started to come down from their highs, zero-knowledge-related coins (IMX, MINA, LRC, ZEC, AZERO, HEZ used to represent the ZK sector is by no means exhaustive) continued to make gains (likely spurred on by the flurry of development activity in Ethereum Layer-2 scaling solutions) and peaked roughly 1 week later.

Around the same time, news that Hong Kong is starting to look more favorably towards crypto, sparked a rapid rotation into China-affiliated coins such as FIL, CFX, VET, NEO, ACH, QTUM, HIGH, COCOS, ONT, DODO, IOST, CKB, whose aggregate market cap peaked a few days after the ZK-narrative coins.

Soon after, the banking crisis triggered a market-wide correction; the end of that correction, marked by the bailout of SVB saw a new narrative emerge as some investors on edge about inflation and the banking system fled to Bitcoin (and Ethereum), which overperformed relative to altcoins.

Total crypto market cap rose by about 50% throughout Q1 2023, from under $800 billion at the start of the quarter to almost $1.2 trillion at the end. Despite the recent increase, the cryptocurrency market still has a long way to go to reach its all-time high, as it is currently down 60% from its peak of almost $3 trillion.

Last bear market, BTC dominance was firmly in the 60-70% range (and the one before that it was even higher) as market participants fled away from risky altcoins to the relative safety of Bitcoin. Some expected BTC dominance to revisit those ranges during this bear market, but that is unlikely to happen, as Ether and stablecoins emerged as alternative safe havens (for the most part). That said, Bitcoin dominance rose from 40% to 46% this quarter (levels not seen since the turbulent mid-2022), likely fueled by concerns around the stability of the banking system. ETH dominance largely stayed flat at 18% throughout the quarter, possibly suppressed by uncertainty surrounding the upcoming enablement of staked ETH withdrawals.

After an unusual, rapid uptrend of spot BTC buying that started in Q3 2022, Bitcoin’s spot to futures volume ratio has been decreasing equally rapidly in Q1 2023 upon hitting a high of 0.68 on Jan. 8, 2023. This might indicate a move into derivatives in response to the regulatory assault on crypto that became apparent in Q1 2023.

However, that interpretation doesn’t explain why the ratio went up so much in the first place, and also does not explain why ETH’s spot to futures volume ratio has been doing something entirely different for the last three quarters, breaking its historically high correlation with Bitcoin’s ratio.

Bitcoin options volume on CME in Q1 2023 increased about 2x from the previous quarter and even reached an all-time high in March 2023 amid the banking crisis and Bitcoin’s price rally. Bitcoin options volumes on exchanges are also up by 30% in Q1 2023 from last quarter (just shy of the previous ATH value recorded in April 2021) – a lower increase percent-wise versus CME but much higher in absolute value.

The rally in volumes might be linked to Bitcoin being perceived as a hedge in the face of banking uncertainty as well as to a more "risk on" environment, as some market participants are pricing in a loosening in monetary conditions. Alternatively, the market could be positioning for high volatility due to factors such as low supply of crypto on exchanges and macro uncertainty.

Open interest (the total number of contracts outstanding in the market) of Bitcoin options on CME is up 67% since the start of the Q1 2023, hitting an all-time-high monthly average volume of $1.3 billion in March.

Meanwhile, open interest of Bitcoin options on exchanges is up 38% QoQ, a lower percentage increase than that registered on CME, which some interpret as a sign that institutional capital is returning to the market or possibly responsible for fueling the Q1 2023 rally in prices. Looking for possible clues elsewhere, it's worth noting that during Q4 2022, only 14% of the trading volume on Coinbase was attributed to retail traders, a significant drop from the 33% seen during the height of the bull market. This may indicate that institutions have exhibited more resilience than retail traders during the bear market. However, it's important to consider that volume figures can be heavily skewed by the types of positions that each group tends to take, with retail traders possibly preferring discretionary positions and institutions favoring shorter-term trades.

DEX trading volumes hit a low of $39B in December 2022, a level not seen since December 2020. However, in Q1 2023 DEX volumes saw a steady resurgence in activity, ending the quarter at $112 billion, a figure last surpassed in May 2022. In March 2023, Uniswap beat Coinbase in volume for the second month in a row and registered over $70 billion for the first time since January 2022.

CEX trading volumes also hit a two-year low ($11B) in December 2022, but started to pick up steam in Q1 2023, seemingly breaking a year-long downtrend. CEX volumes nearly doubled from December 2022 to March 2023 but DEX volumes saw an even more dramatic increase, nearly tripling during the same period.

Prices of all major L1s are down 30-85% from one year ago; notably, however, BNB showed more price stability than BTC and ETH over the past year. SOL was hit the hardest because of its association with FTX and subsequent collapse of its DeFi ecosystem and remains down 85% YoY. Despite not being mired in scandals like SOL, AVAX drew down nearly as much, down 82% from one year ago.

TVL increased 28% from the beginning of the quarter, but remains muted, down 71% from ATH. In terms of how TVL is distributed among chains, the primary change since last quarter is that Arbitrum and Optimism have gained significant ground: Arbitrum TVL nearly doubled from the beginning of Q1 2023 and Optimism also did quite well, with a 1.5x increase in TVL.

Solana and Fantom showed no signs of recovery this quarter as they continue to struggle; their TVL needs to increase by as much as 36x and 18x, respectively, to reach their former all-time highs.

Spurred on by Arbitrum’s highly-anticipated airdrop, Q1 2023 was a good quarter for most of the Ethereum scaling solutions, which mostly registered increases in TVL ranging between 50-90%. ZK Rollups (such as dYdX, Loopring, zkSync Lite/Era) were the only outlier, with a much more modest increase of 16%; however, with the recent launch of zkSync Era and the anticipation of an airdrop, we expect ZK rollups to perform much better in the following quarters. Validiums, led by Immutable X, saw the largest percentage increase, though their TVL remains relatively smaller at $160 million.

Historically, transactions on Arbitrum and Optimism have moved largely in sync, but that correlation has been broken since last quarter, when the Optimism Quest incentive program fueled a surge in activity followed by a sharp drop after the program ended at the beginning of Q1 2023. Arbitrum had introduced a similar incentive program earlier but paused it after only a few days to soothe high congestion and gas fees on the network.

Activity on Optimism declined by 70% after the end of the incentive program, which essentially brings it back to pre-Quest levels. Arbitrum activity started to grow quickly around the same time amidst airdrop hype, and showed little signs of stopping even after the airdrop concluded, ending at 5x as many daily transactions compared to Optimism.

NFT trading volumes picked up from last quarter, which was not unexpected given incentivization from Blur airdrop rewards. However, volumes have been declining steadily following Blur’s latest airdrop on February 14; trading volume in the last week of the quarter is 50% lower than the volume recorded in the week of the airdrop.

The peak weekly volume recorded in this quarter, $270 million, remains almost a full order of magnitude lower than the ATH weekly volume of $2.3 billion at the end of August 2022.

Despite facing challenges in revitalizing its DeFi ecosystem, Solana continues to have a strong NFT ecosystem, behind Ethereum and Ronin. While Polygon experienced some growth this quarter, it still lags well behind Solana, although it's comfortably ahead of chains such as Avalanche or BNB Chain.

The NFT market does not appear to be experiencing a resurgence in risk appetite just yet, as several notable NFT collections have seen significant declines in their floor prices this quarter.

The NFT bear market is also apparent in the number of new NFT mints, which are down by a factor of 100, from hundreds of thousands per day less than one year ago to thousands per day on Ethereum. Interestingly, not only have Solana NFT mints remained much steadier over time, but they now overshadow Ethereum mints, clocking in at almost 7x more mints in March 2023.

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