Nov 10, 2020
How does the price of Bitcoin affect DeFi?
Content developed by the Rio DeFi’s team.
Hong Kong, Tuesday November 10th, 2020
Lately, several media reported a current bullish sentiment around the cryptocurrency market. This has revived a spirit of speculation among crypto lovers. Many are shifting their assets from DeFi platforms to re-invest in Bitcoin, at a time where the leading cryptocurrency is breaking a level of resistance unreached since January 2018.
The price of Bitcoin has increased by 42.35% over the last 30 days while the value of most of DeFi’s main tokens has decreased with Uniswap ($UNI) plunging by -13.58% or Compound ($COMP) by -8.61%. Only a few tokens reported a positive gain over the same period of time such as Maker ($MKR) up +1.56%. This is nothing compared to the month of August where on average, most DeFi tokens recorded a double digital number gain. Although the whole DeFi currently experiences a high volatility and market correction, its TVL is still at +9.72% for the last 30 days, which is a great indicator of growth for this sector! How shall we interpret those contradictory numbers? Could the recent change of bitcoin’s price and its growing demand affect the DeFi sector and if so, how?
DeFi can be seen as a niche industry that uses blockchain technology to develop innovative financial products and services to cryptocurrency holders. It aims to be massively adopted so everyone could take control of its assets. By operating without centralised authorities who can fix or manipulate prices, by removing banks and other intermediaries resulting in more transparency, lower transactions fees and a faster process, DeFi platforms provide a wide range of services including lending, borrowing, safekeeping or insurance — to quote a few — to its users in return for high interest rates or rewards. This concept is not new and takes its roots back to 2016, however it saw an unprecedented infatuation over the past 6 months, when the world entered a global recession. Bitcoin too, went bearish and fell to demonstrate it was acting as a safe haven: by plunging to USD $4,474.74 on March 12th, failing to stabilise at a 5 digit number and by missing a last chance to rebound following the halving period, investors started looking for alternatives. This opened doors to new players willing to push products and services that would arouse people’s interests more than what they could get on centralised exchanges from a bullish bitcoin and alt-coins’ market. Yield farming was born and since, is growing exponentially.
Because many cryptos holders have found DeFi projects valuable and switched their assets on those platforms (or swapped their cryptocurrencies to promising tokens with high APR), the recent spike of bitcoin price — that reached USD$ 15,539 on Friday Nov 6th 2020— is seen as a game changer. New dynamics as well as new trends are emerging. The comeback of cryptocurrencies as an alternative investment resulted in a massive reduction of the trading volumes on DEXes for the month of October. Since a big part of rewards on DeFi protocols is associated with trading volumes, lower volumes leads to lower yields (or interest rates), therefore, in the long term, this could result in shrinking investor’s appetite for DeFi.
However we should be careful before presuming this is the end of DeFi. DeFi is complementary to the cryptocurrency market and both are here to stay.
It’s well known that the fluctuation of Bitcoin’s price affects most alt-coins, including Ethereum. Ethereum is the cryptocurrency of reference for most of DeFi projects since for now, a majority of them are hosted on its blockchain and shall use ETH as a currency to perform transactions on the network. While a low bitcoin’s price did boost the cryptocurrency community to look for alternatives, with investors diversifying their portfolios by speculating on promising DeFi projects, acquiring native tokens or supporting blockchain projects through the use of its services and products, the other way seems to apply: when bitcoin gets momentum, investors pour their assets back to it. Since bitcoin is volatile, there is a high probability it will plunge again, offering DeFi others opportunities to rally and the community more options to leverage on its assets.
The recent fall of DeFi is also a good thing for this flourishing industry. A number of projects launched this summer have already demonstrated unsustainable business models and are either experiencing a market correction or collapsing. Therefore, we can easily anticipate that only serious players with ambitious projects will survive in the coming months. DeFi being risky with high potential returns, it should attract more savvy investors and speculators moving forward, who have learned from this first wave, understand the ecosystem they evolve into and believe in the use of the tokens they purchase or the projects they support, seeing high potential growth in them.
Indeed, now that people have tested the potential that yield farming offers, we doubt retail traders and investors would be satisfied to go back to the old rules led on centralised exchanges where long/short or holding strategies have predominated. The cryptocurrency market has matured with hedge funds and institutions developing high frequency and quantitative trading strategies backed by advanced technology, helping them to take advantage of the inefficiencies of this market. A number of active retail investors, family offices or HNWIs might thus see a brighter future in DeFi rather than bitcoin.
We think DeFi is at its beginning and has way more to offer to its users. The recent flash loans functionality featured on some DeFi platforms is just one example unlocking opportunities to all players, removing entry barriers on capital requirements while maximizing gains return. This is not just an exciting time for traders but also for developers who access more open sources from DeFi protocols and can improve the overall network while pushing the boundaries of blockchain.
While the recent increase of bitcoin price can be seen as negatively affecting the DeFi market on the short term, it will keep attracting new entrants in the crypto space who might turn to DeFi products and services in times where cryptocurrencies show signs of weaknesses and thus, indirectly participate to the mass adoption of decentralised finance and its revolutionary services.
About RioDeFi:
RioDeFi accelerates the mass adoption of digital assets by bridging traditional and decentralized finance. Our vision is a world in which everyone has access to decentralized financial (DeFi) services. We develop solutions that connect banking institutions with blockchain systems. Our applications enable lower transaction fees, faster confirmations, more efficiency, better returns for savings account holders, and global reach.
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