March proved to be a tumultuous month for the crypto industry, given the increasing collective scrutiny from regulators that many in the industry have dubbed ‘Operation Choke Point’. Speculation further intensified when Senator Elizabeth Warren tweeted on March 29 that she planned to build an ‘anti-crypto army’. After some of the few banks that accepted crypto companies as customers were brought under FDIC control, Coinbase was issued a Wells Notice¹ indicating possible securities violations. The Commodity Futures Trading Commission (CFTC) also brought charges against Binance, the industry’s largest exchange, which primarily operates overseas.

Despite the turmoil, the total crypto market cap grew by 11.6%² over the month. Bitcoin, in particular, outperformed the crypto market, gaining 20.5% in value, while Ethereum slightly underperformed at 10.5%³. 

Figure 1: Bitcoin Price (USD) & Timeline

Bitcoin Beats the Banks

The month began with uncertainty surrounding crypto-friendly banks, specifically Silvergate (SI), Silicon Valley Bank (SVB), and Signature Bank (SBNY). Despite the crypto industry facing the loss of access to the US banking system due to these closures, Bitcoin maintained its upward trajectory. Not only did its price increase, but its market cap dominance also rose, which we believe signifies a broader flight to safety within the crypto ecosystem. In contrast, Ethereum’s dominance⁴ remained flat, while stablecoin dominance declined.

Figure 2: BTC, ETH, and Stablecoin Dominance

A closer look at stablecoins reveals that nearly all major⁵ stablecoins experienced redemptions this month, with the notable exception of Tether (USDT), which saw its total supply increase by ~12%, or $8 billion (Figure 3). Tether — despite its opaque business operations and mysterious reserve holdings — has, in the past, always processed redemptions, notably more than $10 billion in two weeks while Terra USD (UST) collapsed. TrueUSD (TUSD) experienced a significant 77% increase in market cap, but remains at roughly $2 billion in total, approximately 1/40th of USDT (Figure 3). In contrast, other major fiat-backed stablecoins like Circle USD (USDC), which have exposure to the US banking system, faced the risk of losing assets amid recent bank failures.

Figure 3: Stablecoin Market Cap Change

The flight to Bitcoin and Tether amidst another potential failure of US banks reinforces the appeal and importance of self-sovereign digital assets. While traditional assets, like gold, are often thought to offer considerable price stability, they lack the versatility inherent in self-sovereign digital assets. For example, a bar of gold has limited practical use. Fractionalizing gold for small payments requires specialized tools, transportation is cumbersome, and safeguarding it can be challenging. On the other hand, digital assets held in self-custody are divisible to 100 million subunits and can be transported anywhere in the world with just a seed phrase and internet access. This ease of use and adaptability make digital assets an increasingly attractive alternative to traditional stores of value, as they grant users greater control and independence from centralized financial systems.

More Ethereum Excitement

Arbitrum, one of the fastest-growing Ethereum Layer 2 (L2) scaling solutions, has recently launched their governance token, ARB, and airdropped it to users who met specific criteria, such as the amount of ETH transferred to the L2 or the number of transactions effected. The announcement on March 16 and the airdrop on March 23 both positively impacted the price of ETH, helping to offset the negative price action resulting from the subsequent Wells Notice issued to Coinbase and the lawsuit against Binance (both of which were unrelated to Arbitrum). Scaling solutions like Arbitrum have the potential to play a significant role in the future of the Ethereum network by enabling it to scale in a cost-effective way.

Figure 4: Ethereum Price (USD) & Timeline

The long-term vision for Ethereum often involves the majority of on-chain activity being abstracted away from the main chain and onto Layer 2 solutions like Arbitrum. With only around 1.15 million transactions per day, the average ETH transaction fee exceeds $5, and any attempt to increase the network’s scalability could risk compromising decentralization or security.⁶ As Ethereum is responsible for securing over $260 billion in value daily⁷, maintaining security is of paramount importance. In comparison, Arbitrum processed 2.7 million transactions, more than 2.5⁸ times the number of transactions vs. Ethereum on March 23, yet its transaction fees were still 84% lower (Figure 5) than Ethereum’s.

Figure 5: Estimated Transaction Savings from L2

Although L2 solutions divert traffic away from the main Ethereum network, we believe they will play a crucial role in onboarding new users into crypto, while continuing to drive value to Ethereum. These solutions offer significantly improved user experiences with faster and cheaper transactions, while still benefiting from their connection to the Ethereum network. By batching multiple transactions together and confirming them on the Ethereum network, L2s achieve their security and effectively share the cost of the Ethereum transaction fee among the batched transactions. This approach requires the L2 to purchase ETH to pay the transaction fees. For example, Arbitrum spent more than $3.5 million (2,127 ETH) to finalize 29.5 million transactions on the Ethereum network in March⁹, showcasing the trade-offs that come with increased efficiency.

Ultimately, when faced with another potential crisis in the US banking system, investors turned to Bitcoin and Tether, illustrating the rising significance of self-sovereign digital assets. Ongoing advancements in L2 solutions, like Arbitrum, highlight the sector’s dedication to delivering enhanced user experiences without compromising security and decentralization. As the crypto ecosystem continues to mature and evolve, we anticipate further innovation that will improve user experiences and cement the role of cryptocurrencies as a compelling alternative to conventional financial systems.

Read more: March 2023 Monthly Recap