Risk-Aversive Bets Reigned Amid Terra’s Notorious Plunge (Report)

Crypto exchange Bybit collaborated with blockchain analytics platform Nansen to publish another monthly report on the state of the crypto industry. It focused on the broader market condition, DeFi activities, and NFT markets.

The paper regarded Terra’s notorious collapse as fundamentally destructive to the nascent crypto community but beneficial to other Layer-one competitors since they have attracted the outflow capital derived from the fallen community.

Investors Adopting a Risk-Off Attitude

The report attributed the significant drop of the total crypto market capitalization to the risk-off mentality inflamed by “the global equity rout.” In the foreseeable future, the report suggested that, as the correlation between the crypto market to the Nasdaq Index remains intact, volatilities in the traditional market will expectedly cause violent price swings among digital assets.

The report viewed the recent launch of various crypto ETFs as a double-edged sword since they would aggravate the selling pressure during the bear market.

Another notable observation, as indicated in the paper, is that net exchange inflows of stablecoins have increased in May, and the supply of such assets has contracted simultaneously. Such scenarios have shown that as the selloff intensified – investors swapping their risk assets for stablecoins – there is a high chance they have exchanged stablecoins for fiats to avoid risks.

The State of Layer 1 Blockchains Amid Terra’s Fallout

Among all the “Ethereum Killers,” Avalanche has maintained significant volume despite the extreme market volatility, as the network continued to facilitate an average of 800,000 transactions per day in April. NEAR Protocol’s Rainbow and Orbit Chain witnessed substantial volume as well, apparently outperforming other major Layer-1 (L1) competitors.

Dominant L1 blockchains, such as Ethereum, BSC, and Tron, have all benefited from Terra’s fallout, the report stated, as their market shares have ticked higher after the abovementioned collapse.

Meanwhile, protocols with a long-operation history tended to experience less outflow volume amid the recent selloff. Also, as capital tended to flow into big-cap protocols for avoiding high-risk assets, Ethereum’s diminished dominance that began in early 2021 has been recently reversed.

However, after analyzing the number of transactions and the total revenue generated across L1 networks, the report noted that both indicators have maintained at levels observed in July of 2021, meaning that there has been no apparent consolidation into Ethereum.

NFTs as a Potential Hedge?

During the latest capitulation event caused by the collapse of the entire Terra ecosystem, NFTs also saw a significant plunge. However, the growth in the number of users and transaction volume has been steady over the bearish period. At the same time, famed NFT projects, such as BAYC, CloneX, and Azuki, have continued to dominate, taking over 80% of the total market share.

Nansen’s research found that the NFT-500 index is inversely correlated to the overall cryptocurrency market when denominated in ETH, making some even treat NFTs as a hedge against their volatile crypto assets.

The report concluded that with the daily active NFT traders having increased multi-fold since a year ago, NFTs have successfully garnered a new base of users outside of DeFi and Web3, establishing a much lesser correlation with the broader crypto market than other fields in the space.