The second quarter of 2023 was a thorough test of cryptocurrency’s strength. The market experienced turbulence as bullish news for Bitcoin, FUD towards two major exchanges, a memecoin rally, and other events. Such uncertainty kept people wondering what will happen next. Read on for the latest market intelligence and an in-depth report on the current state of the cryptocurrency world.

Key Takeaways

• Market Performance
• New Trend in Crypto — Bitcoin Spot ETF
• Regulators Start Taking Crypto Seriously
• Memecoins and Bitcoin NFTs Sparked On-Chain Activity
• Ethereum Liquid Staking Continues to Grow After Shanghai
• Public and Private Fundraising on the Decline
• New Layer 2 Networks Dominate by the TVL Growth

Market Performance

The second quarter was like a rollercoaster ride for the cryptocurrency market, with a decline in April, followed by a rise in May, and a relatively quiet June. The majority of large cap projects showed negative performance in 2Q 2023, mainly due to SEC and exchanges litigation, which has affected many top-100 coins and tokens.

Bitcoin, along with other digital currencies (BCH, LTC, and others), showed one of the strongest performances this quarter. The main driver was news about ETFs and other institutional listings.

Bitcoin posted significantly higher returns than classic financial instruments, outperforming the Nasdaq and S&P 500 indices, gold and silver in H1 2023.

The list of gainers looks modest this quarter. There were no major trends that persisted throughout the months (such as the AI trend in Q1), combined with legal problems of major blockchains (SEC’s attention to Polygon, Solana & Binance).

New Trend in Crypto — Bitcoin Spot ETF

Perhaps the loudest and most significant event for the crypto market was the filing of an application for a Bitcoin ETF by Blackrock, the world’s largest asset manager.

The main beneficiary of this news was, of course, BTC, which showed significant growth and renewed its all-time high of 2023. Blackrock triggered a series of events that is still ongoing, with many asset managers renewing or filing their applications for a Bitcoin spot ETF.

In the midst of this, it’s worth mentioning the Grayscale Bitcoin Trust, which has significantly reduced its undervaluation compared to AUM and rose strongly in value.

An important factor in boosting GBTC’s value was the rumor of a possible purchase of Grayscale assets by a larger corporation, Fidelity Investments.

It’s worth noting that GBTC owns about 626k BTC, which represents approximately 3% of the total supply. It can be assumed that the size of the assets under management for a bitcoin spot ETF in larger funds such as Blackrock or Fidelity would be even greater. In addition to the popularity and increased availability of BTC, this could foster these funds making large purchases of Bitcoin.

However, the SEC is still opposed to the idea and has rejected all past applications (approving only Futures ETFs). According to recent news, they have returned new applications for revision, some of which have already been resubmitted. In any case, we will not see the unraveling of the Blackrock tie-up until mid-Q3, and no later than mid-March 2024 (a month before halving).

Regulators Start Taking Crypto Seriously

Cryptocurrency regulation has become a hot topic in recent years, with both positive and negative progress being made.

US regulators have recently shown a negative attitude towards crypto. In early June, the SEC shocked the industry by filing lawsuits against Binance, CZ, and against Coinbase on the next day. While lawsuits between exchanges and regulators are not uncommon, the SEC’s targeting of industry giants was unprecedented.The lawsuits are particularly significant because the SEC has identified several cryptocurrencies as securities, which has dealt a significant blow to the market.

Binance faced further problems when several European regulators took action against the exchange, leading to Binance gradually withdrawing from the European market.

However, as some doors close, others open. Many Asian countries are becoming increasingly cryptocurrency-friendly, and that’s where most exchanges are turning their attention.

A number of countries that are developing their Central Bank Digital Currencies (CBDCs) are approaching closer the final stage of testing. It won’t be long before we see the first real cryptocurrencies from central banks. This is likely one of the reasons for increased regulation in some regions, as governments attempt to eliminate competitors.

Memecoins and Bitcoin NFTs Sparked On-Chain Activity

Two trends from the second quarter that quickly came and went, but certainly made an impact, were memecoins and Bitcoin NFTs.

The memecoin frenzy quickly swept through the crypto market. It started in April, but a lot of new memecoins came out in May. These memecoins had a big effect on the Ethereum network, which caused a strange change in the top 10 gas-spending coins. Instead of ETH, WETH, and USDT, many memecoins were the top 10 gas spenders.

However, May was not only about the Ethereum memecoin craze. Bitcoin Ordinals became very popular as they allowed digital assets (NFTs) to be stored in a decentralized way on the Bitcoin blockchain. This resulted in the creation of many new memecoins on the Bitcoin network. One such memecoin, Pepe, reached a market capitalization of over one billion dollars, entering the top 100 coins.

Ordinals were first introduced in early 2023, and by the end of May, the number of Ordinal inscriptions on the Bitcoinblockchain had exceeded 9 million. The total fees paid for Ordinal inscriptions increased by over 600% in May, reaching over 1,664 Bitcoin.

Ethereum Liquid Staking Continues to Grow After Shanghai

In April of this year, a major Ethereum update called Shanghai (EIP-4895) took place. This update allows Ethereum stackers to withdraw their rewards and staked coins, and had quite an unexpected result.

Contrary to many expectations, the staking ratio of Ethereum continues to rise even after the withdrawals. It seems that people are now more willing to stake their ETH because they can quickly withdraw their coins.

Liquid staking protocols have shown good performance, with both the price and total value locked (TVL) increasing during the first weeks of Q2. The group of LSD protocols now holds the top spot in terms of TVL among other categories.

The on-chain picture is also interesting. After September’s Merge, Ethereumis no longer a constantly inflationary coin. Now, its supply depends on activity on the network. May 2021 saw strong growth in network activity due to the memecoin frenzy, and consequently it became the month with the biggest decline in Ethereum supply in history.

The recent surge in network activity tested the deflationary nature of the coin during periods of high activity. This further demonstrates the long-term advantages of transitioning to PoS.

Trading Activity Slows Down

As the well-known saying goes, “Sell in May and Go Away”. This refers to the traditionally low trading volumes during the summer months. While June did bring some noteworthy events (and trading volumes did increase that month), the second quarter overall saw a decline in trading volume.

Crypto exchanges recorded a decline in trading volume during the second quarter, reaching its lowest value in over two years.

Decentralized exchanges (DEXs) have fared slightly better, showing just a little decline. With Binance and Coinbaseencountering issues, there is a gradual shift of users towards DEXs. This trend was observed after the FTX collapse, and users are now ready to act more decisively.

Meanwhile, the transition is not only seen in spot trading but also in the derivatives market. DEXs are still a small part of the derivatives market, but their growth is already visible. For example, their market share hit a new high in June. DEXs spot market share also hit an ATH a month earlier, but since then the ratio has slightly declined.

Public and Private Fundraising on the Decline

The first half of 2023 has seen a recovery in the token sales market. Compared to the second half of last year, the market has been rising and shining. However, it is still far from reaching the figures seen in 2021.

It is worth noting that most of the successful token sales took place in the first quarter of this year. The performance of the second quarter is slightly worse, and the ROI of many projects has fallen significantly relative to ATH.

Sui became the most important token sale of the quarter and perhaps even the year. It raised almost $50 million from public rounds. However, there was no airdrop which disappointed many people. We’ll have to wait and see if other big projects follow Sui’s example.

On the other hand, the situation with private fundraising is quite different. For a month in a row, raises have continued to decline (note that in March, Stripe funding contributed $6.5B), and at the end of Q2, they have reached their lowest levels since Q4 2020.

Amid regulatory challenges, many funds are considering relocating their business to more favorable jurisdictions. It is worth noting that the crypto startup raises in the Asian market (through private funding rounds) showed the highest growth over the last 3 months compared to other countries.

New Layer 2 Networks Dominate by the TVL Growth

Due to a price drop in Q2, most blockchains have experienced a decline in Total Value Locked (TVL). Only a few of them have shown significant upside.

BNB Chain has also experienced some problems due to Binance’s issues with the SEC lawsuit and rejections by European regulators. BNB Chain’s TVL has declined significantly amid this news.

On the other hand, the new Layer 2 Blockchains are performing quite well. Polygon zkEVM’s TVL has risen by as much as 3,617% in the quarter, posting the strongest gains. zkSync Era, which may soon rank in the top 10, has shown a substantial increase of +467%. StarkNet, which is still far from the top, but growing fast, has shown a +252% increase.

Liquid Staking is a growing trend this quarter. As ETH accumulation on beacon chain smart contract continues to increase, LSD protocols are gaining popularity and dominance. Ethereum, Solana, and Klaytn are the clear leaders in terms of LSD share in total TVL, while protocols of other platforms are also gaining popularity.

Liquid staking derivatives offer numerous benefits to delegators and validators, resulting in greater stability and network performance. Currently, ETH staking is demonstrating promising returns in relation to risk and market activity. However, in the future, with the start of a real bull run, decentralized exchanges could take the lead once again.

The Bottom Line

The second quarter of 2023 was a real test for the crypto market. Several important events occurred during this period, which will continue to affect the market throughout the year or even longer.

The Bitcoin ETFs fever will have a powerful effect if the SEC makes a positive decision. It will impact both the influx of new investors into cryptocurrency and the massive purchases of BTC by institutions.

We should also expect further regulatory developments, primarily in the US. More and more TradFi influential figures are supporting the integration of cryptocurrencies into global finance. However, the key decisions remain with the regulators.

Despite lower activity in Q2, the market remains positive and lives up to expectations. We are about a year away from Bitcoin halving, which could give a significant boost to the next bull run. The impact of this bull run will depend on how well the crypto industry is prepared for it in the remaining time.