Bitcoin․com Exchange Market Insights Report for May 2022

This is the May 2022 month-to-month market insights report by Exchange. In this and subsequent studies, anticipate finding a abstract of crypto market efficiency, a macro recap, market construction evaluation, and extra.

Crypto Market Performance

May received off to a tough begin because the Federal Reserve confirmed a hawkish bias on the again of lingering inflation. Markets reacted by going risk-off.

The collapse of LUNA and UST added gasoline to the fireplace, with the consequence that crypto markets noticed traditionally massive drawdowns.

BTC reached a low of $25.4k USD, which is 60% off its all-time excessive of $65k. ETH noticed a comparable drawdown.

Other large-cap cash fared even worse, with AVAX and SOL being down over 75% and 80% respectively from their all-time highs.

During the primary week of the month, gaming (play-to-earn) noticed the worst efficiency throughout crypto sectors, adopted by prime property (massive caps) with losses of 9.6%, and Web3, which was down 8.9%.


Macro Recap: Quantitative Tightening (QT) Is Here to Stay

As anticipated by the market, on May third the Federal Reserve introduced that it had voted for a charge hike of fifty foundation factors to the funds charge. This announcement was on the again of “strong” job positive factors and a lower in unemployment, which has led to will increase in inflation. There was additionally the discount of the stability sheet, ranging from $47B per 30 days to as much as $95B per 30 days after the primary three months. According to the Federal Reserve’s later statements, System Open Market Account (SOMA) will cut back its holdings of U.S. company debt and U.S. company mortgage-backed securities (MBS).

The narrative was centered on uncertainties relating to the macro setting, as Russia’s invasion of Ukraine intensifies and supply-chain points in China contribute to lackluster development globally.

CPI information supplied no reduction, because it marked 8.3% for the month of April, beating expectations by 20 foundation factors. April’s numbers had been down solely barely from the 40-year excessive of 8.5% reached in March.

Market Structure: Decrease in Flows and Long-Term Holders Continuing Capitulation

As macro circumstances appear to worsen, we check out on-chain metrics to raised perceive value motion with the purpose of offering a transparent view on what might come subsequent. There are two areas we’ll give attention to. These are 1) lower of profitability by long-term holders (and capitulation) and, 2) stablecoin provide/demand.

The graph beneath is the Long-Term Holder Spent Price vs Cost Basis, which depicts capitulation available in the market by Long Term Holders (LTHs). The blue line represents the Long-Term Realized Price, which is the common shopping for value of all cash that LTHs maintain. This is declining, as you’ll be able to see from the graph, which means LTHs are promoting off their cash. The pink line represents the common buy value of the cash being spent by LTHs on that day. As you’ll be able to see, it’s trending greater, which means that LTHs are promoting at break-even on common.

Stablecoins are a key part of the market, as they facilitate entries of latest gamers in addition to standardizing a unit of trade for crypto. By trying on the provide of stablecoins we will know whether or not or no more contributors are getting into the market. As seen on the graph beneath, stablecoin provide grew tremendously over the last bull market as a result of enhance in demand for crypto and due to new gamers getting into the market. The provide of main stablecoins went from $5.33 billion to $158.2 billion in lower than three years. Note, nonetheless, that mixture stablecoin provide has been flat thus far in 2022.

This was pushed largely by a rise in redemptions of USDC (into fiat), totalling $4.77B for the reason that begin of March regardless of a rise of $2.5B in USDT over the identical interval. In the beneath chart, we will see the 30-day change in mixture Stablecoin Supply vs the Contribution by USDC. USDC has seen a provide contraction by a charge of -$2.9bn per 30 days, which could be recognized within the backside proper nook of the graph by the dashed pink circle.

Being one of the vital extensively used stablecoins, USDC provide contractions point out a transfer of cash from stablecoins as an entire again to fiat. More considerably, this means a risk-off sentiment in addition to weak point within the crypto market general.

LUNA and Do Kwon, The Man Who Flew Too Close to the Sun

In this part we wish to go over the rise and fall of UST and the Terra ecosystem, and the ensuing domino impact that impacted the markets. UST, one of many largest stablecoins ever created, was an undercollateralized algo-stablecoin within the Terra ecosystem. It was created and sponsored by the Luna Foundation Guard (LFG), led by outspoken founder Do Kwon.

As an algorithmic stablecoin, UST carried out a two-token system the place the UST and LUNA provide ought to stay comparable and the place each tokens had been redeemable between themselves. If the value of UST exceeded $1, merchants had been incentivized to burn LUNA in trade for one greenback value of UST, which elevated its provide and theoretically drove the value again to $1.

Meanwhile, Anchor, a DeFi staking protocol throughout the Terra ecosystem, was providing “saving account” offers for customers to stake their UST. This was paying a whopping 20% APY. Anchor generated this yield by borrowing and lending UST to different customers for collateral. A big sum of this collateral was LUNA.

So what went unsuitable? Due to its early success, the Terra ecosystem grew enormously to grow to be one of many largest initiatives by market capitalization, at $40B. LFG, led by Do Kwon, started to consider methods to enhance the backing of UST. Thus, they determined to again a part of their reserves with massive cap cryptocurrencies corresponding to BTC and AVAX amongst others, making UST a multi-collateralized algo-stablecoin. Having accomplished that, the soundness of UST peg grew to become inherently correlated with the worth of the collateral in its reserves. On May eighth, 2022, 4pool Curve, one of many largest stablecoin swimming pools, noticed a rise in UST provide of 60%, as proven within the chart beneath.

Shortly thereafter, an $85 million UST-to-USDC swap introduced the pool again to being solely barely imbalanced. Big gamers subsequently got here in and, by promoting ETH available in the market, purchased the worth of UST again almost to its $1 peg, as proven within the chart beneath.

You can see that the stability of the Curve pool was quickly restored to earlier ranges and the peg was quickly saved. However, on May ninth, we see {that a} comparable state of affairs occurred when one other huge promote of UST was executed on the Curve pool, pushing the imbalance to above 80% of UST within the pool. The value of UST dropped to about $0.60 across the identical time. The crypto market entered right into a panic and the collateral held by LFG grew to become much less beneficial in a downward spiral. This impacted the worth of LUNA, because it’s alleged to be constantly offered to maintain the peg – and this was the start of the top. The peg by no means went above $0.8 from that time on, and the worth of LUNA nostril dived by over 99%, at present sitting at $0.00026 USD.

A whole lot of questions are nonetheless unanswered from the Terra/Luna episode. Specifically, who was answerable for the large promoting of UST on Curve? Was this an orchestrated “assault” to depeg UST? Why didn’t LFG give you a contingency plan to cease the devaluation of LUNA and UST? Why was the method of restabilization of the token accomplished manually by the inspiration and Do Kwon? Are BTC collateralized tokens protected in extremely correlated eventualities?

We are but to see the aftermath of this black chapter in crypto historical past, because the Terra ecosystem and UST are largely marketed in the direction of retail cash. You could effectively see elevated scrutiny from regulators in the direction of stablecoins and crypto general. One factor you should keep in mind from that is that crypto remains to be an immature market and being the decentralized, crowdsourced setting that it’s, comes with excessive danger. Thus, you must at all times needless to say each funding has its dangers and doing your individual analysis continues to be paramount.


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