It’s wintertime for cryptocurrencies; since May 2022, they’ve been in freefall. Many factors contributed to the downturn, some macroeconomic, like the war in Ukraine and the highest US inflation since 1981. Another significant factor was the Nasdaq tech market decline. Though some were crypto-specific, such as the collapse of the stablecoin Terra USD (UST) and the Bitcoin withdrawal restrictions on the cryptocurrency lending platform Celsius.
So, what is driving crypto right now? We introduce five dominant themes under the current market conditions.
#1 Opportunity for building
Behind the curtain, blockchain teams continue to develop transformative products and services to harvest the seeds planted now when the sun shines again.
Despite the current situation, many industry leaders, including Meltem Demirors, CSO of Coinshares, and Ray Youssef, founder of Paxful, point out that we’re now entering a building phase. As Bertrand Perez, CEO of the Web3 Foundation, also emphasizes in a recent interview, during bull markets, many people only think about making fortunes which is the wrong mindset.
In a bear market, bad actors will disappear, leaving the scene to real creators, users, and crypto advocates. Strong teams from diverse niches will continue to build. Staci Warden, the CEO of the Algorand Foundation, mentions that his company focuses on real-world use cases of financial inclusion, a topic we covered in an earlier post on The Digital Sweep; you can read it here.
Remember that NFTs and blockchain games were the driving forces behind the crypto bull markets of 2021/22. The growth in the building phase will most likely continue to come mainly from the gamefi and other web3-related sectors. It may also include projects centered on the creator’s economy, such as NFT music and art marketplaces or metaverse projects. It’s also expected that digital fashion will continue to grow. As mentioned further below, infrastructure projects are also becoming increasingly important.
#2 Algorithmic stablecoins might be over
One of the ripple effects of the recent Terra USDT (UST) crash was an increase in skepticism toward algorithmic stablecoins.
A stablecoin is a cryptocurrency that is pegged to a real-world asset. Its primary use is to safeguard crypto earnings, especially when the markets are volatile. To maintain a stable value, the issuing institution must have enough reserves of the underlying asset. In particular, when holders want to cash out, the stablecoin issuer must have sufficient reserves to repay the required coins. It’s safer to keep an over-collateralized reserve to ascertain it.
The underlying asset that backs the stablecoin is typically a fiat currency, such as the US dollar. These types of stablecoins are known as fiat-based stablecoins. This is the case with Tether (USDT) and USD Coin (USDC), for instance, both of which aim to maintain a $1 value.
On the other hand, Terra USDT (UST) was an algorithmic stablecoin that was not backed by physical reserves but by another cryptocurrency that runs on its network, Luna. The value of the UST coin was determined by a computer code that runs based on the supply and demand principle, like other algorithmic stablecoins. In May 2022, the supply and demand balance system of UST crashed after some investors sold large amounts of it, causing even more people to dump the price of UST. This resulted in the collapse of both UST and Luna coins.
Since many algorithmic stablecoins operate with the same principles as Terra USDT (UST), some raised eyebrows. Among them is the co-founder of Tether, Reeve Collins. He states that algorithmic stablecoins are just a bunch of smart people attempting to figure out how to peg something to the dollar. He believes that the crash had a cascade effect, and that’s why it might cause an end to algorithmic stablecoins.
#3 Expect stringent regulations
Continuing from the previous point, we can predict that crypto markets will face strict new regulations. The first signs have already begun to emerge.
The Responsible Financial Innovation Act, which was released on June 7, 2022, will establish a complete regulatory framework for stablecoins and tax treatment of digital assets.
In addition, The NY State Department of Financial Services announced that it would create clear criteria for virtual currency companies looking to issue USD-backed stablecoins in New York. The requirements of the new baseline criteria address redeemability, reserves, and attestation of stablecoins.
#4 Venture Capitalists are still investing in web3
The recent crypto crash hasn’t deterred investors from backing crypto projects. Smart money sees discounted prices as a long-term investment opportunity.
As a pioneer in the field, Andreessen Horowitz has recently announced their 4th crypto fund worth $4.5B. The investment firm will allocate the new fund to web3 games, DeFi, layer 1 and layer 2 infrastructure, creator economy, and regenerative finance, among others.
Another noteworthy development is the Hong Kong-based crypto startup Babel Finance’s Series B funding round that resulted in a $2 billion valuation of the company. Jeneration Capital, Dan Tapiero’s 10T Holdings, Dragonfly Capital, BAI Capital, and Circle Ventures are among the investors that back Babel Finance.
#5 Blockchain infrastructure projects are increasing in value
According to the data by Dove metrics, there were 169 open crypto VC investments in May 2022.
The majority of the funds, 21%, were invested in infrastructure startups. DeFi received 14% of the total VC investment. NFTs and CeFi categories each received 13%. 10% of the total funds were invested in SocialFi.
Industry leaders evaluate the effects of the recent events to facilitate a healthy reset. Builders gonna build, despite or perhaps thanks to the bear market. The downturn hasn’t scared the smart money away; VCs still pour money into the sector. Therefore, this might be a great entry point when it comes to investing in crypto, so if you decide to do so you can claim your 100 USDT cashback voucher to get started when you create a new account on Binance and fund your account.