Geopolitics and global macro conditions have left economists at their wits’ end and obliterated most markets, while on the other, developments in the crypto and blockchain space continue at an unprecedented and truly unrelenting pace, according to Beinsure’s Crypto Market Review.
Up to November the cryptocurrency market downturn is influenced by several factors:
- Political Uncertainty: The upcoming U.S. presidential election has introduced volatility into the crypto markets. Bitcoin’s recent decline is partly attributed to the diminishing re-election prospects of Donald Trump, who has been perceived as favorable to cryptocurrencies.
- Regulatory Environment: The cryptocurrency industry faces ongoing regulatory scrutiny. Both U.S. presidential candidates are courting crypto-supportive voters, indicating that the regulatory landscape will continue to evolve, potentially affecting market stability.
- Market Concentration Risks: The dominance of large technology stocks, often referred to as the ‘Magnificent 7,’ has led to concerns about market concentration. This focus on a few high-valuation sectors increases the risk for investors, as overvalued sectors may present challenges if market conditions shift.
Given these factors, investors are advised to exercise caution when considering investments in risk assets like cryptocurrencies. Diversification and a thorough assessment of individual risk tolerance are essential strategies to navigate the current market environment.
Economic conditions for crypto have worsened
According Binance Research Report, economic conditions have worsened since the start of the year. Issues such as persistent inflation, high commodity prices, and tightening monetary policies have contributed to a more challenging investing landscape. Crypto fundraising landscape is showing signs of recovery. In the last months, we’ve been in the same cycle in terms of sentiment.
Across sectors, only Energy stocks performed well during the period (up more than 30% for S&P 500 listed stocks) while Consumer Discretionary performed the worst, being down more than 30%.
Crypto was not spared from the market downturn that also plagued traditional asset classes such as stocks and bonds. Black swan events such as the suspension of fund withdrawals by several centralized lending platforms and the collapse of the algorithmic stablecoin TerraUSD (UST) in the first half of this year contributed to further negative sentiments and worries.
Nonetheless, price action alone is not representative of the health of the ecosystem, nor does it show the full picture of the underlying developments. As such, in this report, we aim to share a holistic review of the past half-year in crypto by analyzing the latest data, trends, and outlook across different areas of the crypto ecosystem. We remain optimistic about the long-term outlook for crypto since we continue to see further adoption and innovation in the space.
Crypto was not immune to the market downturn
Crypto was not immune to the market downturn that affected traditional asset classes like stocks and bonds. Unexpected events, such as the suspension of fund withdrawals by several centralized lending platforms and the collapse of the algorithmic stablecoin TerraUSD (UST) in the first half of this year, added to negative sentiment and concerns (see New Trends in the Use Crypto).
Nonetheless, price action alone is not representative of the health of the ecosystem, nor does it show the full picture of the underlying developments. As such, in this report, we aim to share a holistic review of the past half-year in crypto by analyzing the latest data, trends, and outlook across different areas of the crypto ecosystem. We remain optimistic about the long-term outlook for crypto since we continue to see further adoption and innovation in the space.
Cryptocurrency market is challenging economic conditions
The cryptocurrency market is currently facing challenging economic conditions, influenced by several key factors:
- Regulatory Scrutiny
- Political Uncertainty
- Market Volatility
- Institutional Challenges
- Global Regulatory Developments
The U.S. Securities and Exchange Commission (SEC) has intensified its focus on the cryptocurrency sector, extending its oversight into 2025. This heightened scrutiny has led to enforcement actions against major crypto entities, contributing to market uncertainty.
Recent data shows significant fluctuations in cryptocurrency prices, with Bitcoin experiencing notable swings that reflect broader market instability. Major cryptocurrency firms are also facing operational difficulties; for instance, ConsenSys announced a 20% workforce reduction due to macroeconomic pressures and regulatory challenges (see FATF Updates Guidance on Virtual Crypto Assets – NFT, DeFi & Stablecoin’s Standards).
These factors collectively contribute to a challenging economic environment for cryptocurrencies, necessitating cautious consideration by investors and stakeholders.
L1 Development
Competing Layer 1 (“L1”) protocols have innovated with new consensus algorithms, blockchain architectures, and execution environments, but how did they perform this year?
2024 has been a turbulent year for crypto. Total Value Locked (“TVL”) of L1s declined throughout the year, and Ethereum has been losing market share to alternative L1s.
Throughout last year and this, L1s kept on fighting for market share, trying to scale, grow and win in the ongoing multichain battle. Each L1 has tried to gain market share by innovating and trying to solve the “trilemma” of decentralization, security, and scalability.
L1 TVL declining
Source: DefiLlama, Binance Research
Looking closer at the market share across L1s, the downfall of Terra is probably the most noteworthy event, with other chains like BNB Chain and Ethereum absorbing their TVL.
However, with the de-pegging of USDD on 13th June, TVL came down to around US$4B at the time of writing. Despite ongoing competition among L1s, we note that Ethereum is still the market leader by a significant margin.
TVL distribution amongst L1s
Source: DefiLlama, Binance Research
2024 was eventful, to say the least. Polkadot parachains have proven their limits with only limited slots, Polygon experienced congestion, Terra de-pegged and exacerbated the market turmoil, Ethereum announced its testnet merge, and so much more. The list can go on forever.
Perhaps the world may not be ready for full decentralization, but there have been stepping stones in getting there this year. Scaling is slowly happening, and different approaches will position the different L1s to each have their strengths and weaknesses. While Avalanche is bringing online new subnets, Ethereum is targeting rollups – in the end, it remains to be seen which approach works the best.
L2 Development
The challenge of scalability within L1 platforms has transitioned from a distant and theoretical limitation to one that desperately needs to be tackled in the current market climate.
This fundamental issue, perhaps most notably illustrated by the exorbitantly high fees in the Ethereum ecosystem, has given rise to what is maybe one of the key crypto narratives in 2022-2024: layer 2 (“L2”) scaling solutions. In this section, we discuss the increasingly visible integration of L2 solutions within dApps across the space, the leading L2 projects and their upcoming or rumored tokens, and the possible trajectory of the broader L2 network landscape.
L2 Fees and Increasing dApp Integration
To open our discussion, we can have a quick look at how transaction fees have continued to spike, even in a relatively quiet market, and thus have necessitated a move towards L2. Given that Ethereum’s ecosystem remains the largest by TVL and number of dApps, we can use it as a proxy for our general discussion.
Layer 2 Fees
L2 solutions process transactions off the main blockchain (Layer 1), alleviating congestion and lowering fees. For instance, Ethereum’s mainnet can handle approximately 15 transactions per second, leading to high fees during peak times.
L2 networks, such as rollups, batch multiple transactions off-chain and then submit them to the mainnet, significantly reducing costs. This approach not only decreases fees but also maintains the security and decentralization of the main blockchain.
Impact on dApp Integration
The reduced fees and enhanced scalability offered by L2 solutions have spurred increased dApp integration. Developers are leveraging L2 networks to provide users with faster and more cost-effective experiences.
Notably, Layer-2 solutions like Optimism and Arbitrum have seen significant growth in dApp integration, with increases of 590.91% and 160.87% respectively. This trend underscores the growing popularity of L2s among dApp developers and users, as they offer faster and more affordable solutions than Layer-1 blockchains.
With this in mind, and the trend we have seen so far, L2 deployment appears on track to become more and more ubiquitous as we enter the second half of the year and it would not be surprising to see most, if not all, of the top ranked dApps being deployed on some form of L2.
AUTHOR: Peter Sonner
