Terra Debacle Diminishes Risk Appetite by Crypto Investors

The cryptocurrency and blockchain industry continues to find itself in an interesting position. Although the overall sentiment is far from optimal, there are always exciting takeaways to consider. The new report by ByBit and Nansen paints an interesting future for this industry, although a market recovery doesn't appear in sight yet.

Investors Continue to Fuel Uncertainty

When prices go sideways or bearish, every investor looks to the rest to see what the next move will be. Many speculators have high hopes for an "epic" market reversal, pushing bitcoin, ether, and other assets to fresh all-time highs this year. Unfortunately, most investors do not necessarily agree, as tapering off risk has become the go-to strategy in recent months.

More specifically, crypto investors have taken on the behavior of Wall Street investors. That means they try to negate risk by whichever means necessary. As cryptocurrencies are volatile by default - and have been bearish for months - they make for a less exciting opportunity these days. The side effect is how the market cap of bitcoin or ethereum virtually mimics the Nasdaq Composite. That is not necessarily good, although one cannot fault investors for trading more carefully.

Additionally, the report by ByBit and Nansen highlights how there is less ETH outflow from exchanges. An increase in withdrawals will often positively influence the price, as there is less liquidity. So far, the ETH outflow has decreased, creating more uncertainty. This behavior is fueled by the recent UST stablecoin issue and the upcoming proof-of-stake merge, slated for later in 2022.

Making matters even more intriguing is the declining interest in crypto derivatives products. Despite noting a peak interest on April 5, 2022, the markets have cooled off significantly. May's market volatility creates lower interest in derivatives for all crypto assets, as no one has any indication of where markets may head in the coming weeks.

Stablecoins, TVL, and NFTs

One would expect investors to pay closer attention to stablecoins when markets are this volatile. The Bybit & Nansen report confirms there is some healthy interest in pegged assets, despite the recent implosion of TerraUSD (UST). Over 8% of the capital tracked by both parties is locked in stablecoins. Moreover, the inflow of stablecoins across exchanges has increased over previous months, which can signify an interest in buying assets cheaper.

As investors flock to stablecoins over other assets, the overall Total Value Locked across major DeFi networks - Ethereum, BNB Chain, Avalanche, Solana, Polkadot, etc.) has dropped off significantly. In fact, the current levels are similar to those recorded in July 2021.

Furthermore, all networks process a similar number of transactions compared to May 2021, indicating that any growth has been virtually negated since then. One interesting takeaway is how Avalanche can compete with Ethereum for an overall transaction count - 800,000 vs. 1 million - since the downturn started in April 2022.

Another popular industry in the past few years, NFTs, have seen their growth retrace nearly entirely. All statistics have reverted to numbers seen in early 2022, with social NFTs representing 83% of the market. The remainder belongs to gaming-related non-fungible tokens, leaving little or no room for other projects in this space. That is rather remarkable and leaves many wondering where things head next for NFTs.

The Industry Needs a Boost

Regardless of how one interprets these numbers, the industry clearly needs some excitement to boost the overall figures. Not everything is doom and gloom, but the lack of growth - and nuking of any previous prominent momentum in the past year - does not bode well.

Moreover, the lower risk appetite by investors confirms they will not offer much support to get things started again, creating a rather intriguing outlook for the second half of 2022.