2020 seems to be the year of Decentralized finance (DeFi). In a matter of months, the market cap of the DeFi space has gone from a billion-dollar to nearly $8 billion, as per DeFiMarketCap.
In 2020 so far, Aave (LEND) has surged a whopping 2,600%, Kyber network (KNC) 800%, Bancor (BNT) 511%, Republic Network (REN) 495%, Loopring (LPC) 413%, Synthetix (SNX) 174%, 0x (ZRX) 118%, and Augur (REP) 105%.
There are only a few DeFi coins that have recorded either shallow greens or losses such as Maker. But despite these massive gains, 2020 might not be done with these yet!
More Gains for DeFi
“We are still early in the DeFi cycle, and while valuations are no longer cheap, they are not exuberant either,” said Spartan Black, a partner at crypto hedge fund The Spartan Group.
He argues that those who joined this cycle early on are still allocating more capital to DeFi. In contrast, new pools of DeFi allocated capital are being formed, which will get allocated in the coming months.
On top of that, many investors are still “heavily overweight” BTC, ETH, and other legacy digital assets.
“Driven by the rise in the valuation of listed DeFi assets, we are also starting to see inflation in the valuation of DeFi assets on the private side (notably for “series A” rounds),” he noted.
Interestingly, these assets are not widely available on centralized exchanges, which are starting to play catch up as these projects see a spike in prices and increased valuation.
“As more exchanges list these assets in the coming months, opening them up to more investors, this will facilitate the re-allocation of funds to these newer DeFi assets causing them to re-rate further in absolute terms and relative to legacy crypto assets,” said Black.
But Not for ETH or BTC
Ethereum-based DeFi tokens have been flying, recording substantial gains to Ethereum, which is only up 86% YTD.
But while Defi tokens can still rally despite these massive gains, it's harder for the second-largest network to see such gains yet, or Bitcoin for that matter. This is because “DeFi can rally without a ton of new money coming in, but BTC/ETH is at the point where they need real, institutional/macro fund flows to take it to the next level,” said analyst Ceteris Paribus.
Crypto investor, co-founder, and CIO of BlockTower Capital – Ari Paul – is also of this opinion. He explains that most of the new money in the crypto space first flows into BTC and some other large-cap cryptos, allowing crypto insiders to profit in those coins, before looking at riskier investments like DeFi tokens.
Moreover, the same amount of dollars funds will have a bigger impact on DeFi tokens than the $27 million market cap Ethereum.
“Recycling of profits is real when there's new real money entering the system, but likely has a pretty small impact on BTC and ETH since they're so much bigger than the token profits that can be recycled,” Paul said.
As such, the analyst is not excited about a big ETH rally right now, even though Crypto Twitter is calling for it.
“Can ETH be a higher beta play in a full-on bull? Sure. But it's hard to see ETH making a huge move with BTC range bound. Just a different level of capital needed for that,” Ceteris Paribus said.