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Market Outlook

Deep Dive

In this report, we’ll delve into several on-chain and off-chain metrics to gauge the health of the extant market, following which we’ll also explore several facets within the crypto space that deserve more attention.

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The term “bear market” is commonly used to describe a steep and sustained market downturn. As a rule of thumb, the term is typically coined when an index falls by more than 20% from its recent high.

Source: CoinMarketCap (as of May 27, 2022)

Drawing from the graph above, the total cryptocurrency market capitalization has fallen by 58.6% in the past 6 months. From this, we can safely assume that we are currently residing in a bear market. 

In this report, we’ll delve into several on-chain and off-chain metrics to gauge the health of the extant market, following which we’ll also explore several facets within the crypto space that deserve more attention — as well as the decentralized finance (DeFi) instruments that could help navigate through this crypto winter. 

Market Cap — Bitcoin Dominance May Expand Further

Source: CoinMarketCap (as of May 26, 2022)

From the graph above, the Bitcoin Dominance chart has been on an upward trend since UST’s (since renamed USTC) fallout. With BTC’s price drop from $47K to $30K in March, most investors moved to adopt a flight-to-safety strategy.

 is largely influenced by the market cap of Bitcoin in relation to the market cap of the entire cryptocurrency market. Therefore, when an uptrend in the BTC dominance index is viewed in tandem with a declining price of BTC, this may spell further trouble for altcoins. 

To illustrate, most altcoins, including Ether, have recently had a significant portion of their market share shaved off. The only altcoin that’s managed to escape this is BNB, which has managed to remain pretty resilient in price even in the aftermath of Terra’s implosion. 

BNB’s impressive performance generally stems from Binance’s resilient ecosystem — more specifically, the popularity of PancakeSwap, and the BNB Chain’s outperformance of transaction data relative to Ethereum, as seen above.

In sum, Bitcoin dominance may continue to expand if the bear market persists. Capital could flee altcoins and favor BTC. BNB’s outperformance of the other altcoins might endure if investors still deem its connection with Binance as helpful to weathering the bear market.

TVL — Ethereum, BSC, and Tron’s Gaining Share

The plummeting prices did take a toll on other aspects of the broader crypto market too, namely within the domain of Total Value Locked (TVL). 

With regard to TVL, the market peaked in November of 2021, and has been on a decline since. As observed from the chart above, the TVL in the broader crypto market has dropped to levels last seen in July of 2021. 

The DeFi space’s market share of TVL also recently experienced an abrupt change on May 7, 2022, following Terra’s fallout. This sharply reversed the trend of diminishing Ethereum dominance that had begun in early 2021. 

Ethereum, BSC and Tron have benefited the most from this unfortunate enforced industry shuffle, as their market shares rose by 8.86%, 2.14% and 3.16%, respectively, after the fallout. 

Tron’s share gain can largely be attributed to its newly launched stablecoin USDD, which offered a 30% yield to stakers in a bid to siphon away capital from other chains. This must have worked, as there’s been pretty strong growth in TVL for protocols within Tron’s ecosystem since. 

Source: DefiLIama, CoinGecko (as of May 27, 2022)

Note: “Minor chains” refers to all other chains with TVL ranking behind Near. We incorporate BTC price data here to represent the general crypto price movement.

As shown above, changes in the TVL share of Ethereum have been consistently negatively correlated with BNB Chain throughout the past year. It appears that the emergence of BNB Chain, an ostensibly faster and cheaper substitute, has stolen away a decent chunk of Ethereum’s TVL share. 

The recent market shuffle seems to have bucked this trend, as Ethereum is now (as of the time of writing) gaining market share at the expense of other smaller chains. On an interesting note, this is actually something that hasn’t happened in previous downturns. 

Other top chains like Solana, Avalanche and Polygon did get a bit of their market share shaved off, but overall their shares still stand at a pretty solid level.

When all the above is considered, this points to the possibility that a consolidation might currently be taking place within the Layer 1 space.

Zooming out on the TVL breakdown by protocols, those with a long operation history seem to have experienced fewer capital outflows in the recent sell-offs. 

Additionally, protocols like MakerDAO, Uniswap and Aave have also been outperforming their peers. As these protocols are primarily based on Ethereum, this may explain Ethereum’s growing dominance with regard to market share. 

Source: pancakeswap.finance (as of May 27, 2022)

Moreover, PancakeSwap’s relative outperformance in TVL seems to stem from its robust on-chain activities. 

After delving into the more granular transaction details, we noticed that GST and GMT token transactions have accounted for around one-fifth of PancakeSwap’s total volume in May. 

At this juncture, we’re still unable to reach definitive conclusions as to whether Ethereum and BNB Chain will continue as main focal points of consolidation within the Layer 1 space throughout the entirety of this bear market. 

Since the UST saga, the majority of capital has been residing in Ethereum and BNB Chain. In this next segment, we‘ll explore whether or not minor chains have truly lost favor among investors in the bear market. We’ll be looking primarily at the holding and transaction activities by smart money within these minor chains.

Source: nansen, Osmosis, Elrond (as of May 27, 2022)

As an overview, transaction activity on Ethereum, BNB Chain, Arbitrum, Solana and Fantom has remained relatively healthy. 

We can derive from the graphs above that the number of transactions across these top-ranking chains has (as of the time of writing) still maintained at decently healthy levels (consistent with those of July 2021). It’s apparent that there has been no clear consolidation into Ethereum when it comes to top-ranking chains.

On the other hand, other smaller chains, such as Osmosis and Elrond, have been suffering from severe capital outflows, with the TVL of both chains dropping by 90% since their peaks. 

This pattern does make some sense, as investors will typically de-risk and/or consolidate their portfolios (to avoid holding and trading the smaller-cap altcoins) in a bear market. Also, despite high APYs, investors might not be willing to yield-farm on altcoins in a bear market as these activities will expose them to an increased risk of capital losses.

Therefore, if the bear market persists, there’s a chance that capital from minor chains will be consolidated into top-ranking chains.

From the above, we can observe that the stablecoin percentage held by wallets has been climbing in relation to the declining holding percentage since March of this year. Once again, this does make sense, as it’s been proven time and again that investors definitely prefer holding onto stablecoins in periods of volatility.

Lower Leverage, but with High Expected Volatility

Source: Coinglass, Skew (as of May 30, 2022)

From the graph above, the total future open interest across all cryptocurrencies has declined remarkably to levels last seen in September 2021. 

In contrast, the broader market valuation has already dwindled to levels last seen in July 2021. The open interest in Bitcoin futures has also remained at a pretty solid level, something that partly accounts for the above divergence.

Additionally, DeFi lending on MakerDAO, Aave and Compound has dropped to levels last seen in May 2021.

From this, it’s clear that deleveraging during a bear market has become the norm, probably due to a general fear of liquidations, as well as investors’ overall desire to de-risk.

In a bear market, investors will generally choose to deleverage, hedge their position, and/or possibly seek shelter in fixed-yield instruments to safeguard their wealth. 

This section will explore several DeFi instruments that investors can consider during a bear market.

Explore Safer Shelters and Hedge in DeFi 

In a similar way to the traditional finance space, fixed yields can be achieved through credit and derivatives in DeFi. 