2022 hasn’t been kind to crypto buyers, but the major swoon earlier this year has a silver lining that might prove to benefit other risk investors.

Following a widespread sell off in Q1, according to Coinmarketcap, crypto’s total market capitalization dropped by more than half (-56%) in the second quarter. However, since July, crypto’s total market capitalization is up 7%.

“We may have hit the ultimate bottom months ago because of cascading liquidations,” Thomas Dunleavy, senior market analyst with Messari, told Yahoo Finance. “The market is down to only the true believers at this point. Most of the sellers seemed to have left.”

With the rise of interest rates by central banks, crypto de-leveraged in a big way starting in May with the collapse of the $40 billion Terra ecosystem followed by the hedge fund Three Arrows Capital, lenders Voyager, Celsius and others. Major crypto executives including Genesis Trading’s Michael Moro, Kraken’s CEO Jesse Powell, and Sam Trabucco of FTX’s affiliated trading firm, Alameda Research, also resigned.

Celsius Network’s CEO Alex Mashinsky also left his position, citing that he regretted how his continued role during the firm’s bankruptcy had “become an increasing distraction.”

Year-to-date, bitcoin and other cryptocurrencies remain some of the biggest losers among risk assets, seeing drawdowns 60% for bitcoin and as high as 84% ​​for other coins like Avalanche (AVAX).

But in Q3, Bitcoin was little changed (+1%) while the Nasdaq (^IXIC) fell 2.7%, the S&P 500 (^GSPC) fell 4%, and the Dow (DJI) fell 5.4% as of market close Friday.

And while bitcoin hasn’t proven to be an inflation hedge that promoters said it was, the asset class — dominated by speculation worsening macro conditions — could continue to push crypto as a leading indicator for how much risk investors are taking.

“A crypto rally is certainly no guarantee, but it’s always a good leading indicator,” Farrell said.

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VanEck portfolio manager Pranav Kanade noted that crypto’s performance in the current bear market does not feel as existential as previous rough patches.

“In the 2018 to 2019 bear market, it was not clear that the space was going to survive,” Kanade said. “This time around, during the drawdown from the market’s peak in December, there’s a feeling of inevitability in the ecosystem.”

Kanade added that whether crypto investing moves beyond speculation depends on whether crypto teams can attract more users to various blockchains. Furthermore, for those apps to work, blockchains need to scale their throughput (transactions per second).

“Crypto makes up less than 50 basis points of all global assets today and there’s about 2.5 million daily users of blockchains today,” he explained. “But there’s more than 4 billion people with smartphones. For market caps to grow, daily active users need to grow.”

And while Ethereum’s Merge upgrade did nothing for scaling throughput, the market has interpreted the move in the right direction.

Ether (ETH-USD), up 26% from $1,057 on July 1 to $1,339 Friday afternoon, has outmatched bitcoin an most other asset’s performances since July.

“Now we know how a lot of these chains like Ethereum, Solana or Cosmos are going to do it, so now it’s just a race to get there first,” Kanade said.

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David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers

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