In this episode of Unchained Podcast, Laura Shin is joined by Lucas Nuzzi, Head of R&D at CoinMetrics and Larry Cermak, VP of research at The Block to discuss the current state of the crypto market, including the potential for contagion effects and the challenges faced by VC companies.
Read our notes below to learn more.
Lookback on 2022
In 2023, the crypto industry is expected to see a shift towards finding product-market fits and a focus on use cases that add value and potentially abstract the idea of a blockchain being in the background.
The product-market fit of projects will be tested in a potentially contracting market.
There will also be less liquidity and less retail in the market, leading to a slower and quieter market overall.
The impact of the events of 2022 such as the collapse of FTX and decreased credit will also continue to be felt in the market.
Overall, there will be a trend toward skepticism and second-guessing in the market.
Crypto prices
Coins like $TRON, $XRP, $BSV, $ETC which are not thought of as high quality have performed well in the market.
Unlocks for investors who bought coins at a low price sell them off when the market is bearish.
The trend of tracking unlocks will continue in the future and VC investment in the crypto market will also continue to be a trend.
Contagion
There has been ongoing fallout and contagion in the cryptocurrency industry following the collapse of FTX.
The situation has been exacerbated by the issues surrounding FTX, Genesis, DCG, Gemini, and potentially Grayscale.
The contagion has affected projects that were already struggling and had little runway leading to their demise.
Larger institutions have been able to obtain short-term liquidity at unfavorable terms to remain afloat, but there is a danger that they will push the problem further down the line.
It is likely that the contagion will continue to haunt the industry in 2023 with additional companies potentially facing the same fate if market conditions do not improve.
Genesis has been heavily exposed to previous collapses and is currently struggling to secure funding.
It remains to be seen how this will affect its parent organization and other companies within it.
The current market conditions make it difficult for projects to raise capital.
Bear market
In 2018, there was a feeling that the industry might not recover, but now it is generally accepted that it will.
However, in 2022 there have been more collapses and projects going to zero, possibly due to the current macroeconomic environment and a lack of capital.
Crypto has not yet existed during a recession or a period of monetary tightening, making it difficult to predict market dynamics.
Investors will need to be careful in choosing which projects to invest in and look for what technology is actually solving problems and providing value.
The current time is more optimistic for the industry due to an increase in use cases and a desire for better services.
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Crypto VCs
There is a lot of capital from investors on the sidelines, but it has not been allocated as much as before due to higher standards and lower valuations for investments.
Many companies are raising money due to financial distress and their valuations have decreased significantly in the past six months.
However, these funds will eventually need to allocate their capital and there will be a focus on more long-term oriented projects.
The nature of venture capital investing has also changed, with an increased emphasis on due diligence to prevent scams and failures.
This environment is favorable for venture capital investing, but it has changed in terms of the work involved.
BTC mining
The Bitcoin mining industry is currently in debt and facing bankruptcy, with the price of Bitcoin and mining being unprofitable for many miners.
There is expected to be a significant decrease in hash rates in the industry in the coming years, which may lead to a painful environment for miners.
The decrease in hash rates and value of mining hardware will lead to a cleansing of the quality of miners and improve the industry for the next cycle.
The most efficient miners will be valuable in the future as they will be able to survive in a difficult market.
MEV in Ethereum
There are concerns about censorship and single points of failure within the Mev infrastructure, and the trend towards Mev being more profitable than mining pools is seen as negative.
However, there is hope that the use of proposer builder separation (PBS) will improve the situation and make the network more modular and secure.
Alternative layer 1s
There will be competition within the Ethereum network and the scaling of layer 2 solutions in 2023.
There will be less appetite for alternative layer 1 projects but expect more focus on maturing layer 2 technologies such as Optimism, ZK Rollups, Polygon, Stark, and ZK Sync.
The roll-ups and L2s will accrue a lot of value and will positively impact Ethereum.
Unsure which chain will accrue the most value in the future.
Stablecoins
The stablecoin industry has become more competitive in recent times, with companies such as Binance $BUSD trying to gain market share from rivals like Circle $USDC.
There has also been a collapse of algorithmic stablecoins, with Tether facing criticism but still surviving.
In the coming years, stablecoin companies are expected to continue doing well due to the favorable environment for them, with a focus on revenue and interest rates.
Reserve-backed stablecoins are thought to have achieved a strong product market fit, while algorithmic stablecoins have faced problems and concerns.
Tether has particularly strong usage in the Asia Pacific region.
DeFi
Defi had some successes during the financial crisis in 2022, but trading and total value locked are currently down due to the decrease in the value of coins.
The sector has also faced a lot of hacks, leading to speculation about what will happen in 2023.
It is believed that the focus should be on improving the user experience and making the technology more accessible and usable, rather than just focusing on earning money through farming.
Product market fit is expected to be a major topic for Defi in 2023, with a focus on unique use cases such as flash loans and better lending protocols.
There is a need to balance centralization with the unique benefits of the tech.
NFTs
The trading volume for Ethereum NFTs has decreased significantly from over a billion dollars in April to around 200 million dollars currently.
NFTs will continue to be popular due to their appeal to younger people and potential for product market fit in areas such as online trading of physical cards.
Creator royalties may not be sustainable in the long term due to the technical complexity of implementation and unfair competition.
Alternative methods of monetization may need to be explored for NFTs.
Binance dominance
Binance is currently a dominant player in the cryptocurrency exchange market, accounting for nearly 90% of trading.
However, it is reportedly being investigated by the Department of Justice.
If anything were to happen to Binance, it could have a negative impact on the overall market and on the faith of new investors.
It could also have long-term effects on regulation and the industry as a whole.
While the risk of Binance being affected severely by regulations is low, there is still a possibility of an impact.
There is also the issue of the dominance of one player, which could be seen as a near monopoly, and the potential negative consequences that could have on the industry.
Final thoughts
ZK-rollups will launch and will be used by normal people in 2023.
On-chain analysis is here to stay and will continue to be a useful tool in the future.
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TODAY’S EDITION IS BROUGHT TO YOU BY TREZOR HARDWARE WALLET
Navigating the waters of crypto is risky; even the biggest CEXs & stable coins can have huge risks…
Act now, click the link below & become your own bank via self-custody.