CryptoCompare 2023 Outlook Report: New year, new narratives

• Throughout 2022, digital assets saw a notable increase in correlation with traditional assets. Bitcoin and Ethereum returned -65.4% and -68.3%, respectively, in 2022, compared to -33.6% for the NASDAQ 100 and -19.0% for 10-year US Treasury bills.
• The collapse of FTX has dramatically affected exchange outflows, volumes and liquidity on almost all centralized exchanges. For example, exchange volumes in December were down 43.0% from November. Outflows also recorded an increase in November – with a 47.8% increase in outflows compared to the 2022 average.
• High inflation in emerging markets has led to increased investment in crypto assets. Binance, one of the most widely used exchanges, has been able to capitalize on this trend and is often the most available choice for users in these markets. For example, TRY and BRL saw a 232% and 72% increase in their BTC volume on Binance, respectively.
• The total locked value (TVL) in DeFi fell 24.7% to $74.3 billion, posting the second largest quarterly TVL decline in DeFi history (2018 to date), behind only the collapse of the Terra ecosystem in second quarter of 2022. DeFi also recorded its first year-to-date decline in TVL by 76.4%.
• In 2022, the median return of all liquidity pools in the DeFi sector fell from 6.24% to just 1.87% at the end of the year. This is lower than 3-month Treasury bill yields, which currently stand at 4.40%. In addition to falling token prices, low yields have been a factor that has contributed to the decline in TVL.
• The market cap of stablecoins, currently at $138 billion, has increased its dominance over the total crypto market cap to 16.6% from 6.76% in early 2022. Although Tether has remained the largest stablecoin with a market cap of $66.2 billion, its market share has declined due to the surge in Circle’s USDC and Paxos’ BUSD.

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Digital assets are increasingly correlated with Equinces
Throughout 2022, digital assets saw a notable increase in correlation with traditional assets. Bitcoin and Ethereum returned -65.4% and -68.3%, respectively, in 2022, compared to -33.6% for the NASDAQ 100 and -19.0% for 10-year US Treasury bills.

As adverse market conditions continue to materialize and affect the economy, we expect the correlation between crypto assets and stocks to gradually decrease in 2023.

Stablecoin market cap dominance on the rise
The market cap of stablecoins, currently at $138 billion, has increased its dominance over the total crypto market cap to 16.6% from 6.76% in early 2022. Although Tether has remained the largest stablecoin with a market cap of $66.2 billion, its market share has declined due to the surge in Circle’s USDC and Paxos’ BUSD.

Decentralized stablecoins have largely taken a backseat to centralized stablecoins, with DAI and FRAX, the largest in the industry, seeing their market caps fall 43.6% and 43.0%, respectively, to $5.06 billion and $1.02, respectively billion USD had to accept.

DeFi Sees Its First Annual Fall in Total Value Locked (TVL)
The total locked value (TVL) in DeFi fell 24.7% to $74.3 billion, posting the second largest quarterly TVL decline in DeFi history (2018-present), behind only the collapse of the Terra ecosystem in second quarter of 2022. This also meant that DeFi saw the first annual drop in TVL in its history, falling 76.4% year-to-date.

Ethereum remains the largest network in DeFi with a 68.7% dominance and increased its market share from 64.8% in the third quarter, even as on-chain TVL fell 20.2% to $51.0 billion. Notably, Solana’s total value fell 81.7% to $445 million in the fourth quarter after the collapse of FTX and Alameda Research.

A key factor that has become increasingly apparent in the DeFi sector over the past year is the decline in the annualized return of DeFi protocols, particularly when compared to returns in traditional finance, which have increased due to quantitative tightening. In 2022, the median return of all liquidity pools in the DeFi sector fell from 6.24% to just 1.87% at the end of the year. This is lower than 3-month Treasury bill yields, which currently stand at 4.40%.

Accelerated adoption of digital assets in emerging markets
Binance’s rising market share is also a result of increasing cryptocurrency adoption, particularly in emerging markets. High inflation in these markets has led to increased investment in crypto assets as people seek to protect their wealth from currency devaluation.

Binance, one of the most widely used exchanges, has been able to capitalize on this trend and is often the most available choice for users in emerging markets. For example, RUB and BRL volumes increased significantly, with BTC volumes up 232% and 72% respectively on Binance.

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The information provided in this report does not constitute any advice or recommendation by CryptoCompare. Any redistribution of charts appearing in this review must cite CryptoCompare as the sole provider and creator.