This article is part of our Year in Review series.
Is a bear market a foregone conclusion?
That’s the vibe as we head into the new year. And there’s little doubt why — the December selloff has stung and the market is confronting a litany of challenges.
For starters, the crypto market has lost a fifth of its value since peaking in November. Investors have been shedding risk in the face of the Omicron outbreak and central banks’ moves to fight soaring inflation and taper government support for their respective economies. (Stock markets in the U.S., Europe, and Asia have also declined in the fourth quarter).
At the same time, regulators such as Gary Gensler at the U.S. Securities and Exchange Commission and Janet Yellen at the U.S. Department of the Treasury seem determined to crack down on crypto platforms and stablecoins. This comes on the heels of the legislation that passed this summer requiring crypto ventures in the U.S. to collect and report tax data for their clients, a costly chore many projects are ill-equipped to execute.
If all that wasn’t enough, leading crypto exchange Binance is under investigation by the Commodity Futures Trading Commission’s probe into possible tax evasion, money laundering, and insider trading.
And traders are wondering if the unprecedented bull market that’s created so much upside since April 2020 has finally run its course. Cycles do end after all, and with the market cap of crypto assets up 200% in 2021 and an astonishing 1,100% since the start of 2020, a long deceleration seems like a natural progression.
Even so, there are some positive initiatives underway in the Ethereum community that could change the narrative. The Eth2 chain-merge is currently estimated to go live during the first half of 2022, bolstering staking returns and eliminating mining rewards as inflationary pressure on Ether’s supply.
Further, with the burn rate and network activity surging, Ethereum 2.0 is expected to enjoy deflationary issuance once mining rewards have been eliminated — meaning that ETH will likely be destroyed at a rate outpacing the creation of new coins.
Moreover, Ethereum’s L2 ecosystem is also only getting started. Optimistic and Zero-Knowledge rollups are promising to scale the network’s throughput by up to 100x, according to Vitalik Buterin. Gas costs for rollup networks are also expected to see a 5x reduction with the forthcoming EIP-4488 upgrade. That could be a huge lift for sentiment in DeFi.
Let’s not forget that the double-digit plunge in DeFi assets in December also creates a lot of space under all-time highs. And if there’s one thing we know about market behavior in this space it’s that investors like to close those gaps. They just need a reason. Ethereum 2.0 might just provide one.