DeFi Tokens Are In For A ‘Rude Awakening’ As Capital Rotates Into Bitcoin
As Bitcoin has started trending up, altcoins and DeFi tokens that have been hot for the past few weeks have started losing their shine.
From Ethereum, XRP, Cardano, Stellar, VeChain to Tron, BAT, and Chainlink, many are seeing red as Bitcoin dominance takes charge once again, jumping above 64%, up from 61.50% on Saturday.
Many Altcoins have retraced towards their respective 200 Daily EMAs and are keeping them as support at the moment
Keeping the 200 DEMA as support is a useful indicator of bullish long-term investor sentiment
— Rekt Capital (@rektcapital) July 28, 2020
Since hitting the June 2019 high of $13,900, BTC dominance has remained above 61.5%, and each time it has bounced near this level, “Bitcoin Dominance seems to rally for weeks afterward (meaning alts could continue to sell off),” said trader Josh Rager.
According to him, the money will funnel into Bitcoin in the next six to eight weeks, which isn't a good time for altcoins. But in late 2020, another “strong” alt-run could ensue.
The price of most tokens powering DeFi also lost 10% to 20% of their value last week. But total value locked (TVL) continued to soar, hitting $3.67 billion on the weekend, which has now slowed down.
Against BTC, in the past week, Compound has lost 27.6% of its value, Aave 25.5%, Kava 24.5%, Kyber Network 23%, Loopring 22%, ZRX 20%, Bancor 19%, Synthetix 18%, Balancer 17.5%, and Maker 4.42%. Spartan Blac of crypto hedge fund The Spartan Group said,
“A further rotation of capital into BTC and ETH will likely expose some of the DeFi projects that are overhyped.”
Even stablecoin Dai’s on-chain supply that more than doubled has fully retracted over the last week. The jump in supply was likely the result of very attractive yield, in some cases, 1,000%, on YFI, and 500% APR on Balancer.
The chase for yield in DeFi will only continue to grow exponentially.
$3.5 billion USD locked in DeFi, nearly $15 trillion locked in negative yielding debt. pic.twitter.com/d3XOrXvTDg
— Max Bronstein (@max_bronstein) July 24, 2020
According to Spartan Black, the COMP token distributed in June “unlocked the potential of token incentives to bootstrap liquidity on a platform,” and created a “eureka moment” for DeFi.
This sparked a frenzy in yield farming and a spike in the TVL in the DeFi sector. But with interest to farm yield so high, Defi projects had to offer higher yields to attract capital and liquidity, he said.
Here, the success of the Kyber network, Aave, Curve, and Balancer, had investors chasing after small-cap projects to replicate the success, just like it happens with altcoins when bitcoin becomes “too expensive.”
This led to a rise of projects like REN, Thorchain, Ampleforth, and yEarn, “whose overnight success illustrates the animal spirits that powerful incentives can generate,” said Spartan Black.
He is expecting to see a lot of speculative activity in the DeFi space to unwind before it hits bottom, which won’t be a “death knell” for the sector but a “rude awakening.” He said,
“DeFi will make a comeback again once the price of BTC stabilizes and this short term DeFi cleansing is complete. That could take months, or it could be over in weeks given the pace of crypto.”