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Dear nation without a bank,

Here’s a fun hypothesis: what would the state of crypto be without the downfall of Terra, Three Arrows Capital, and so many crypto banks?

Of course…that would be a lot better.

Unfortunately, the damage is done.

We are now wondering how fast can the industry recover?

And what does the fallout look like in Q3 2022?

Bitwise – an institutional crypto asset manager – publishes a quarterly Crypto Report that captures key trends in different crypto sectors.

Today’s bulletin is a summary of that report.

Despite a brutal second quarter, there’s more good news than you might think.

The crypto is recovering.

See for yourself. ⬇️

– Team without bank

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Guest writers: Bit Research Team

Graphic by Logan Craig

The third quarter of 2022 was, very quietly, a decent quarter for crypto.

Overall, the sector was up 10%, with many individual assets posting significantly higher gains.

Ethereum, for example, rose 31%, propelled by the success of Merger, a technological upgrade to the Ethereum blockchain that reduced its carbon footprint by more than 99% (among others). Meanwhile, Lido, a popular DeFi asset, jumped 260% as users flocked to its “liquid staking” service.

These movements were all the more impressive given the difficult macroeconomic environment, which caused the S&P 500 to fall more than 5%.

Crypto’s positive price trends were supported by generally positive news flow. On the regulatory side, the White House released its first-ever “comprehensive framework” on crypto, while Congress took significant steps to craft thoughtful stablecoin rules.

Meanwhile, venture capital has continued to flow into the space (although at a reduced rate), and several blockchains have achieved significant technological milestones.

However, all this progress could not eclipse the damage caused by the implosion of Terra and 3AC, and the resulting crypto credit crisis in the second quarter.

The second quarter was the worst quarter for crypto in 10 years, with major large-cap assets falling nearly 63%. With this framing, the recovery in the third quarter was modest at best.

And to be fair: Q3 was not without bumps in the road. We have seen threats of aggressive enforcement action from the US SEC and a continued decline in user activity in DeFi, NFT and other areas.

Yet, zooming out, we’re excited about the strength we’re seeing in developer activity, one of the most fundamental indicators of growth in the space. Ethereum, for example, saw a 143% year-over-year increase in crypto application deployments in the third quarter, with deployments increasing by 14% in the two weeks following The Merge.

As we move into the fourth quarter, investors don’t know what to expect.

Will crypto continue the modest recovery that began in Q3, or will negative macro news overwhelm fundamentals and send prices to new lows?

And with crypto becoming an increasingly discussed — and hotly debated — topic among regulators and lawmakers, what role, if any, will it play in the upcoming U.S. midterm elections?

This report is a good starting point to answer these questions. Looking at both fundamental data and qualitative news, it examines the major trends that are developing in several areas of the crypto market: Bitcoin, Ethereum and emerging layer 1 blockchains, DeFi, NFT and Crypto Equities.

We hope you enjoy it.

Read the full report

The rising US dollar was a dominant global force in the third quarter, crushing all other currencies. Seen through this lens, bitcoin has held up remarkably well.

The third quarter was difficult for major world currencies and gold. The main world currencies (EUR, GBP, JPY, CHF) and the Chinese yuan all fell 3-8% against the strong US dollar. Gold was also down 8% in USD.

Meanwhile, Bitcoin bucked the trend, rising 3.1%.

This decision was so surprising that the New York Times published an article with the following headline: “Currencies around the world fall. Except bitcoin.

Source: Bitwise Asset Management with data from Bloomberg.

Layer 1 blockchains gained 27% in the third quarter as positive news about the merger and other network upgrades overcame macro headwinds.

Ethereum’s inflation dropped over 90% and its energy consumption dropped over 99% after The Merge (the network now consumes less energy than Paypal, YouTube or Bitcoin).

The transition to proof-of-stake, a consensus mechanism that many doubted could power a major blockchain, went smoothly.

But it’s not just Ethereum – other blockchains are undergoing major upgrades. The common vision is more features, lower costs and more common applications.

Source: Bitwise Asset Management

Liquid staking cemented its position as an important new DeFi primitive post-merger, with DeFi staking deposits hitting an all-time high in the third quarter.

Staking is one of the first financial services where a DeFi protocol beats centralized financial service providers: Lido, the leading decentralized staking service, has a larger market share in staking than Coinbase, having established a dominant position with 31.0% market share of all staked ETH.

Lido has generated over $375 million in cumulative revenue, almost all of which predated The Merge.

Source: Bitwise Asset Management with data from The Block and Defi Llama as of September 30, 2022

Venture capital and partnerships with big brands were bright spots in an otherwise tough quarter for NFTs.

VC funding for NFT and Web3 games jumped 66% in August compared to July, the latest months for which we have data.

This is remarkable, given the general decline in blockchain/crypto-venture activity. Collectively, the new offerings indicate a shift in the use of NFTs from digital art and collectibles to games, Metaverse apps, and more utilitarian apps. Another major growth area for the NFT sector in the third quarter was that major brands, sports and media companies announced new partnerships to launch NFT strategies.

Source: Bitwise Asset Management as of September 30, 2022

Circle’s SPAC is scheduled to close in Q4 2022, providing public access to the emerging leader of the stablecoin boom.

Circle, the co-creator of USDC, is expected to go public between Q4 2022 and early 2023 through a $9 billion SPAC merger with Concord Acquisition Group.

USDC is one of the fastest growing stablecoins in the world: USDC issuance grew 85% year-over-year in Q2 2022, and there is now over $55 billion in ‘USDC outstanding.

Meanwhile, Circle’s business model relies on rising rates – the company earns income on the collateral that backs its stablecoin. As rates rise, the revenue opportunities are significant: Circle has $43.5 billion in reserves of US Treasury securities, which at current yields would bring in $722 million in annual revenue.

Source: Bitwise Asset Management with data from The Block and Coin Metrics

You can access the full Bitwise report here.

Disclosure: Investments in crypto assets are inherently risky and include the possible loss of capital. Nothing in this article is or should be construed as a recommendation to buy or sell any securities. Past performance is not an indicator of future performance.

The 2022 Third Quarter Report was produced by the following members of the Bitwise research team: Alyssa Choo (@alyssachoo_), Anais Rachel (@Anais_Rchl), David Lawant (@dlawant), Gayatri Choudhury (@GayatriPC_), Juan Leon (@singularity7x), Matthew Hougan (@Matt_Hougan) and Ryan Rasmussen (@RasterlyRock).

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No financial or tax advice. This newsletter is strictly educational and does not constitute investment advice or a solicitation to buy or sell assets or to make financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time to time, I may add links in this newsletter to products that I use. I may receive a commission if you make a purchase through one of these links. Additionally, Bankless writers hold crypto assets. See our investment disclosures here.


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