data taken at 9:35am 11/09/2020
Written by: Yves, Head of Trading at Wirex
The cryptocurrency market dropped further this week, back to levels seen at the end of July. The Bitcoin price (BTC/USD) breached the $10,000 level several times this week, but remained relatively stable after last week’s severe correction . The Ether price (ETH/USD) was certainly more volatile this week, falling below $320 on the week-end, before bouncing back to $377. The total ETH locked in DeFi according to defipulse tumbled this week losing close to 4 millions over a few days span. This represents $1.4 billion, or close to 18% of the total value locked in the DeFi economy. Is the DeFi boom, the second driver of the Bitcoin bull run , really failing?
In fact the drop in value of the defipulse indicator is not imputable to the DeFi economy, but to the defipulse indicator itself. The technical drop is due to one project called Uniswap. Uniswap is a decentralized “automated liquidity protocol” that lets the user create liquidity pools on any ERC20 token, or swap against any ERC20 token available: in other words, a user can create a market. It is not the first liquidity provider (e.g. Bancor), but it is completely decentralized and highly scalable. Anyone can create an ERC20 token, and list it on Uniswap. It is essentially a decentalized exchange with no barrier to entry. There is no such thing as a “KYC onboarding”. Hence a plethora of ERC20 tokens are attracted like flies to honey, from serious projects to funny ones, and obviously scammers.
A hard fork of the Uniswap protocol, a community-based project called SushiSwap , was created at the end of last month. This week, SushiSwap transferred its ETHs out of the Uniswap platform to its own , completing its migration. It became the largest Decentralized Exchange (DEX) by liquidity . This transfer explains the drop of the defipulse indicator: Sushiswap is not tracked by defipulse.
Sushiswap is for the major part, a slightly enhanced copy of the Uniswap protocol. It’s only a few weeks old… Still, the SUSHI token’s market capitalization is above $200 millions, very close to the market capitalization of Waves . The DeFi economy is mostly open-source, which makes it prone to competition. But it is also very difficult to grasp for any investor, and prone to scamming as the project’s value is far from protected. Most certainly, the Sushiswap transfer triggered a cascade effect in the DeFi space, fueling the volatility of the ETH price this week . The DeFi economy is growing like a network of financial institutions, where instruments are always more intricatly integrated into each other. As standalone projects, their leverage is limited and under control. Together, the leverage possibilities are difficult to assess, leaving the door opened to domino effects.
Despite the uncertainty created by the Sushiswap episode, there is still a positive DeFi dynamic . This dynamic translates into more transactions on the Ethereum blockchain… Coinmetrics reports that the adjusted value of ETH transfers (in USD) surpassed the adjusted value of BTC transfers on September 1st for the first time since January 2018, and again on Saturday this week. The high transaction fees also compensate the miners for validating transactions on the blocks. We mentioned last week that the record fees could hinder Ethereum’s scalability. But the high fees also cover the miner’s costs, and offer an alternative source of revenue. Miners should not be so keen on selling their cryptocurrencies at any level. After all, based on their financial statements, the break-even cost of mining Bitcoin should be in the $10,000 to $12,000 range. Both the higher transaction fees, and the lower prices, should alleviate the market’s selling pressure.
From a technical analysis point of view , the Bitcoin price broke its bullish trend 2 weeks ago, and the price stability this week could be considered as a confirmation that the bears are not done yet. Only a rebound above $11,250 would set the Bitcoin price back on a strong bullish path.
From a derivatives market point of view , the one month 25-delta skew jumped to the 10%-15% range, but the longer term skew is settling, suggesting the 3-months, 6-months expectations are still on the bullish side.
The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.