The two largest cryptocurrencies gained by more than twice as much in the first half of the year versus traditional assets, spurring hope that the worst of the bear market is over.

Bitcoin and Ethereum posted year-to-date gains of 85% and 63% respectively, compared with gains of 32% for the Nasdaq, 16% for the S&P 500 and a loss of 4% for the Hang Seng Index. Commodities also underperformed digital assets, with raw sugar up 14%, gold climbing 5%, and gasoline rising 1.5%.

The combined market capitalization for crypto now sits at $1.2T after gaining 24% since the start of January, according to CoinMarketCap. Crypto’s outperformance so far in 2023 follows the 2022 bear market, which wiped $2T from the combined cryptocurrency market cap in 12 months. 

The 2022 downturn was accelerated by the abrupt collapse of Terra network and its algorithmic UST stablecoin in May 2022, which sent contagion risk reverberating across the web3 industry and deleted billions of dollars in value from the DeFi sector. The collapse of Three Arrows Capital followed. Failures of centralized crypto lenders like Celsius and BlockFi came next, and the unraveling of FTX ended what may have been the worst year for crypto’s history. 

Halving Hype Propels Bitcoin

BTC now boasts a nearly $596M market cap and last traded hands for $30,700. The bullish price action propelled Bitcoin’s market dominance to its highest level since April 2021.

Surging on-chain activity and early anticipation for Bitcoin’s next halving have helped propel BTC as the second-best performing asset among the top 30 cryptocurrencies by market cap for the year. The next halving event will take place around early May next year, reducing the rate of new Bitcoin issuance by 50% to 3.125 BTC per block.The creation of the ordinals inscription method and BRC-20 token standard pushed Bitcoin’s on-chain activity to new all-time highs. The inscription methods introduced fungible and nonfungible tokens on Bitcoin for the first time, giving rise to new use cases for the network.

LSTfi Drives Gains For DeFi

The DeFi sector produced modest gains in 2023 so far, with the total value locked in DeFi protocols growing 20% from $37.9B to $45.5B since January, according to DeFi Llama.

The majority of growth took place on Ethereum and its Layer 2 ecosystem, with Ethereum’s TVL up 23% at $27M and Layer 2s up 140% to $10B, according to L2beat. Tron’s TVL also increased 36% to $5.6B.Mixin emerged as a top 10 chain after its TVL grew 73% to $445. Solana also hosted a notable rebound, gaining 32% to $271M from $205M.

However, with Ethereum’s Layer 2 ecosystem undermining the value proposition of low-cost alternative Layer 1 networks by reducing the costs of transacting on Ethereum, many networks have stagnated or shed TVL this year.

BNB Chain hosted the largest TVL decline, currently sitting at $3.4B after starting the year with $4.7B in locked assets. Fantom also suffered a significant loss of 42%, with its TVL sliding to $203M from $351M.The market cap of DeFi assets also showed strength YTD, increasing by almost 50% to $50B  from $34B, according to CoinGecko.

Liquid staking projects drove the lion’s share of DeFi’s market cap growth, with Lido’s stETH staking derivative up $9B, Lido’s governance token LDO gaining $1.1B, and Rocket Pool’s RPL governance token adding $400M to the sector’s capitalization this year.

Deflationary Ethereum

Ethereum realized its deflationary promise this year, with ETH’s circulating supply falling by 286,827 coins YTD worth $559.3M at current prices.Half of all Ether destroyed since Ethereum switched to Proof of Stake last September were burned during May amid a sharp resurgence in memecoin trading, with the network’s burn rate remaining relatively low during other months.

The combined transaction volume on Layer 2 extended its lead over Ethereum this year, with L2s beating mainnet by 335% with nearly 36 transactions per second.Arbitrum is the most popular L2 with 25M transactions over the past 30 days, followed by zkSync Era with 22.3M, and Optimism with 14.6M. For comparison, Ethereum processed 31.4M transactions over the same period.