Bitcoin ETF Competition & DeFi’s Credit Boom

Crypto faces shift in traditional finance products, while decentralized leverage expands

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This week we analyze crypto adoption in both traditional finance and decentralized finance (DeFi). We begin by evaluating the competition for Bitcoin ETFs and the ongoing rotation of long-term capital there. Then we highlight the increased demand for lending protocols on-chain, which have been quietly expanding.

Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether

• Bitcoin and Ethereum fees rebounded as market volatility increased

Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges

• Bitcoin recorded a sixth consecutive week of inflows into CEXs, with nearly $2B in net deposits since December
• ETH, on the other hand, saw $460M in net outflows from CEXs as it sustains its recent relative strength

Bitcoin ETF Competition

A week after the launch of the Bitcoin ETFs, the market appears to have mixed feelings about their short-term impact. Bitcoin’s price is down 16% from the high realized shortly after the approval announcement, and has been hovering around the $41,000 level. Through this correction, the ETF competition appears to be heating up.

Source: IntoTheBlock’s Bitcoin Network Indicators

Long-Term Rotation — Bitcoin’s average holding time of transacted coins hit an all-time high on Monday as people exited GBTC

• Grayscale successfully converted its GBTC product into an ETF, but left its fees at a hefty 1.5%, 5x greater than Blackrock’s fee
• As a result, GBTC has recorded $2.2B in outflows, losing almost 10% of its assets under management
• It is unclear how much of these assets have added sell pressure to the market vs ended up in competing ETF products
• That being said, the aggregate amount held by Bitcoin ETFs has increased by approximately $1B net after GBTC’s outflows, pointing to more capital flowing in than exiting Bitcoin in TradFi markets
• Following their debut, Bitcoin ETFs surpassed silver ETFs as the second largest commodity by AUM, only after gold

DeFi’s Credit Boom

Demand for leverage in crypto is growing as reflected in DeFi lending protocols. The amount of active loans in lending protocol has nearly doubled over the course of the last year.

Source: IntoTheBlock Lending Protocol Perspectives

1.5 Year High — Loans outstanding in lending protocols surpassed $7B for the first time since June 2022

• Demand for borrowing in lending protocols has recovered along with market sentiment, accelerating in Q4 2023
• Compared to 2021, the demand has been largely “organic” as most established lending protocols do not have sizable incentive programs active
• Aave continues to dominate in this category with over 50% of loans issued through their platform

Source: IntoTheBlock Risk Radar

ETH Deposits in Aave v3 Set ATH — Over 600k ETH has been deployed in Aave v3 on Ethereum for the first time

• The increase in supply in ETH amounts shows that the increase in the value of loans outstanding is not just due to prices increasing
• The amount of USDT and USDC in Aave v3 has also been setting all-time highs

While DeFi might not be getting as much attention on social media, it is clear that usage for lending protocols is quietly booming. DeFi bluechips successfully came out of the bear market and are seeing renewed interest as demand for financial services builds up on-chain. Ultimately, this credit boom is likely to further accelerate if the bull market continues.