Jul 21, 2020
DeFi Alt Season
This ‘’Alt season’’ has been defined by the surge in activity from DeFi and the so-called ‘’liquidity yield farming”
Another week passes and Bitcoin and Ethereum both continue to consolidate sideways. Volatility has compressed further with BTC now at 15-month lows and ETH close to 4-year lows, with the market’s expectation of a significant breakout continuing to build. As we have experienced before in the crypto market as a whole, during periods of low Bitcoin volatility and consolidation we see greater action in the Altcoin markets, and sometimes the emergence of the infamous ‘’Alt Season.’’ Alt Season refers to periods of time where Altcoins (short for all cryptocurrencies other than Bitcoin) appreciate in price quicker (often dramatically so) relative to USD, BTC, and ETH. During such periods traders look to capitalize on market FOMO and retail hype before moving accrued profits from the low cap Altcoins back into BTC and USD which would typically signal the end of the cycle.
Looking at BTC dominance by market capitalization (above chart), we can see why traders have recently taken to social media in excitement over the current market dynamic in Altcoins. A ~6% reduction in BTC dominance from 69% to a low of 62.5% since the beginning of May, coinciding with the compression of volatility, shows capital cycling out of BTC and into select long positions in the Altcoin market. In previous cycles (notably 2017 and 2018), we have seen a frenzy of activity where seemingly any and all Altcoins would move up vs BTC and USD when this market set up occurs. These historic price gains occurred regardless of the quality of the team or indeed the strength of its token model. However, as the crypto market matures and traders and speculators become more aware and educated of where value may actually reside within the Altcoin market, we are seeing a more refined cycle with capital moving from BTC into specific projects which have been identified as valuable by more traditional and rational means.
This ‘’Alt season’’ has been defined by the surge in activity from DeFi and the so-called ‘’liquidity yield farming’’ which has spurred the total amount of USD value locked up across all DeFi projects to hit $2.94bn at the time of writing. This is fast growth for the Ethereum network and the decentralized finance use case narrative associated with the ETH protocol. The sky-high returns within yield farming are the catalyst for this growth and those with the risk appetite to chase the 100% yields available are driving up the Altcoins linked to this new trend. Yield farming is simply market participants taking advantage of the higher interest rates that DeFi protocols offer to lenders. Once within the DeFi system, lenders (traders) look to capitalize on the incentives provided by the various protocols to provide liquidity capital to markets, often decentralized exchanges (DEX). This ’’ liquidity’’ incentives are often in the form of tokens which can then be sold by the traders for more BTC or USD equivalent stablecoins. These incentives boost the interest rates offered by DeFi, and very significantly so recently, leading to 2017 ICO style returns.
Notable DeFi Altcoins include Aave, Synthetix, Ren, and Loopring all exhibiting triple-digit returns since the beginning of May.
Away from DeFi, we have also seen the emergence of social media driving price appreciation in some Altcoins, notably DogeCoin. Hugely popular Chinese mobile app Tik Tok led the massive run-up in the price of DogeCoin as ‘’influencers’’ posted memes and encouraged followers to buy the cryptocurrency causing the coin to rally +100% before the inevitable sell-off.
Although the crypto market has grown up considerably since the 2017 and 2018 ICO frenzy, the Altcoin market is still highly influenced by social media but we anticipate that this trend will diminish as capital allocation into Alts becomes more sophisticated. The scars from the ICO bubble are still deep enough for many to remember the risks.
Looking ahead, BTC dominance has found support at ~63% but a move down towards the next resistance level would see dominance fall to ~60% and provide additional capital to the current Alt season trend. However, like with all previous Alt seasons, they do come to an end and BTC price action will likely determine when and how this happens. A breakout in either direction will likely slow down this current Altcoin cycle.
Twitter & Centralization Flaws
Twitter’s importance as a global communications platform is without a doubt significant and hugely influential. Used by heads of state, leaders of industry, and celebrities, as well as central to the crypto community, the power to reach a global audience at a click of a button has become normalized and is also used extensively by major news broadcasters and digital content providers globally.
The trust and faith that users have subconsciously bestowed in Twitter was exposed and severely tested on Wednesday last week, as hackers took control of highly influential accounts, accessed private messages, and published a series of coordinated Tweets promoting a scam over a period of several hours. Starting with several crypto ‘’influencer’’ accounts, the scam moved to target exchanges and technology companies (including Apple and Uber) before targeting the likes of Barak Obama, Jeff Bezos, Kim Kardashian, Bill Gates, Warren Buffet and Joe Biden.
Within hours, an estimated 350m impressions had occurred as the scam made its way through the Twitter community and resulted in victims transferring approximately 13 BTC at the time of writing. It is also possible however that the hackers themselves transferred money into the wallets to try and legitimize the scam.
Twitter’s post mortem of the events claims that employees may have been socially engineered in such a way that access to the control functionality of the platform was given up and subsequently abused to the advantage of the hackers. Motherboard alleges that employees were actually paid off by the hackers — full article here.
Despite the relatively small amount of USD value raised by the scammers, this extensive hack and exploit of Twitter’s human resources highlights wonderfully the fundamental flaw with centralized service providers which is concisely discussed in famed polymath and computer scientist Nick Szabo’s article Trusted Third Parties are Security Holes. Millions of users, including Donald Trump, are at the mercy of the fallibility of a handful of Twitter employees and the security measures, or lack thereof, that secure the platform and its data that it collects and aggregates over time.
It’s interesting to highlight the opposing characteristics of this hack — on one side it was an attack on the weakness of centralization of an institution that has an outsized power to distribute largely unchecked and unfiltered content. On the other side, the attackers were trying to profit from the scam by leveraging the decentralized nature of Bitcoin insofar as that anyone who transferred BTC to the hacker’s wallets would not be able to reverse the transfer. Obviously, if the hackers had asked for USD to be transferred to their Chase account, then the centralized nature of JPM would allow their back office to freeze accounts and reverse payments.
Despite what the media subsequently spun, this was an attack on Twitter and not an attack on Bitcoin. This was not a Bitcoin scam; this was a scam that used Bitcoin as the method through which the hackers aimed to profit. The reason why? Because Bitcoin in many ways is better money than anything else in existence, a direct result of the fact that no one controls it and cannot manipulate and change it as they see fit. Bitcoin’s decentralization is core to its success and the market knows this. The price of BTC barely moved last week even as all the major news channels pushed the ill-informed scam narrative.
Sadly, fraudsters will use the best tools available to them to commit their chosen crimes. Bitcoin, in so many ways, is better than USD, or gold or other value transfer mechanisms because of its decentralized, open source characteristics. The media may focus on what generates clicks and drives advertising revenue but those who understand Bitcoin and other digital assets appreciate the asymmetric benefits vs negative illegal use cases of digital assets.
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