First Mover: As Bitcoin Rally Pauses, DeFi Keeps Astounding

First Mover: As Bitcoin Rally Pauses, DeFi Keeps Astounding
DeFi keeps getting hotter as bitcoin takes a refresher.
(Creative Commons, modified by CoinDesk)

Bitcoin (BTC) was lower, after the quick reversal of a  reportedly spurred by the U.S. Office of the Comptroller of the Currency’s decision to  and use stablecoins as payments. 

“Bitcoin has started 2021 with a stark reminder that volatility is the norm,” Matt Blom, head of sales and trading with the cryptocurrency firm Diginex, wrote Monday. 

In , European shares dropped after the U.K. imposed a new coronavirus-related lockdown. U.S. stock futures pointed to further losses after the benchmark Standard & Poor’s 500 Index slid 1.5% on Monday, the gauge’s worst start to a year since 2016. Gold rose 0.4% to $1,954 an ounce. 

The cryptocurrency subsector of decentralized finance, known as DeFi, is getting hot again. Maybe even hotter than in mid-2020, a timespan so sizzling with fast-paced growth that it became known as the “.” 

Total collateral locked into DeFi protocols, the most commonly used metric for gauging uptake of the systems, has climbed to new record highs above $17.5 billion, according to DeFi Pulse, a website that tracks the space. That’s up from about $10.5 billion at the end of September and less than $1 billion at the start of 2020.  

In DeFi, entrepreneurs are building semi-automated lending and trading systems atop blockchain networks – aiming to someday, potentially, challenge banks and Wall Street trading firms. The arena rose to prominence in June through September of last year as a flurry of usage and high-profile token rollouts ignited enthusiasm among traders and venture-capital investors alike.   

The phenomenon faded from cryptocurrency headlines as ‘s price rally dominated market conversations in the final quarter of 2020, but a recent resurgence in DeFi has industry analysts buzzing again over its prospects.

“User growth over time is ballooning and should continue to accelerate,” the cryptocurrency analysis firm Delphi Digital wrote in a . 

Prices for – the native cryptocurrency of the Ethereum blockchain, which has attracted much of the DeFi development – have soared 37% this year alone, outpacing bitcoin’s comparatively feeble 7% start to the year. 

The elevated pace of transactions on the Ethereum blockchain has also pushed up network congestion, sending fees to an , according to Decrypt, a news site, which cited the data provider Glassnode. 

DeFi “can be best thought of as an emerging sector within the frontier digital asset market,” Dan Zuller, a partner at the investment consultancy Vision Hill,  in an op-ed. “Investors that put capital to work in this thematic sector of digital assets generally outperformed bitcoin and the digital asset market beta in 2020.”

According to Messari, a cryptocurrency data provider, the top 10 DeFi tokens, as ranked by market capitalization, have jumped an average 18% in the first several days of 2021, led by the decentralized exchange Loopring’s token and decentralized derivatives platform Synthetix’s SNX. Uniswap, the biggest DeFi project with $1.4 billion of locked collateral, has seen its UNI tokens gain 10%.  

Denis Vinokourov, head of research for the cryptocurrency prime broker Bequant, said in an audio interview over Telegram that he’s encouraged by last month’s launch of a , a platform designed to help users . 

The development company behind the project late last year  led by the digital-asset investment firm Pantera Capital. 

That’s despite DeFi sector risks exposed last year, when several platforms were upended by ,  and  – the latter seen as so serious a threat that industry executives and journalists gave the maneuver its own term, the “rug pull.” 

“The decentralized world of chaos is becoming more professionalized,” Vinokourov said. “There’s huge growth potential.” 

– Bradley Keoun

The staggering rally from $10,000 to $34,000 over the past three months looks overbought, from the look of price charts. However, blockchain data suggest the cryptocurrency has scope to rally even more.

For example, take the MVRV Z-score, which is derived from blockchain data and  the average deviation of individual coins’ market value from their realized value – the price at which they last changed hands. The metric is used to assess undervalued and overvalued market conditions.

Bitcoin’s market-value-to-realized-value (MVRV) Z-score has risen to a three-year high of 5.32. But it remains well below the 7.0 score at which an asset is considered near a top, according to Glassnode. Historically, above-7.0 readings  the end of bull markets. 

Options traders also remain hungry for further upside,  crypto derivatives research firm Skew. The one-, three-, and six-month put-call skews, which measure the cost of puts (bearish bets) relative to calls (bullish bets) are hovering well in negative territory. That’s a sign of bullish bias.

Further, the market is now looking less overheated than it did 24 hours ago with the perpetual funding rate – the cost of holding long positions on major derivatives exchanges – falling to 0.039% on Tuesday from an 11-month high of 0.137% reached Monday.

Though the path of least resistance appears to be on the higher side, the cryptocurrency may face some temporary selling pressure if equities react negatively to potential Democrat failure to sweep Tuesday’s Georgia elections. Analysts at  that a Democrat-controlled Senate would pave the way for bigger fiscal stimulus. 

– Omkar Godbole

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