Does Bitcoin’s Price Affect DeFi?
Unless you have been living under a rock for the past week or two, you will probably have heard the news that bitcoin (BTC), the flagship of the cryptocurrency community, is grazing its all-time high value. At the time of writing, BTC is hovering around $18,400 per coin, heading toward the $20,000 it teased in December 2017, before the spectacular crash that took it all the way back down below $4,000 a year later.
As many investors are keen to note, though, a lot has changed for cryptocurrencies since bitcoin hit its highest level to-date, and widespread recognition of the value presented by crypto has prompted a flood of venture capital and institutional money into blockchain technology.
Moreover, the three years since the last big bitcoin price rally have seen massive innovation in crypto assets, not least the emergence of decentralized finance (DeFi): a groundbreaking, open source platform that is providing a template for a fully democratic financial future.
The real alternative system
For the uninitiated, DeFi is perhaps the most important development in crypto since bitcoin, because it is opening up digital assets to the masses in the way bitcoin founder Satoshi Nakamoto called for in the coin’s white paper, but likely never envisioned. Through the network of decentralized apps and exchanges that have emerged in recent years, the average investor has access to opportunities simply not imaginable in mainstream finance run on fiat currency.
From a market capitalization of nothing a little over five years ago when only a handful of projects like Maker were around, the total value locked (TVL) in DeFi now stands at more than $14 billion — and that’s nearly $1 billion more than when we wrote about it two weeks ago! 2020 has undoubtedly been a catalyst for growth, with price action driven by the colossal returns available from liquidity mining on the various DeFi portals that have appeared over the past 12 months.
A higher level for all
With the vast majority of protocols in the space running on the Ethereum blockchain, a rally in the value of bitcoin doesn’t have much to do with DeFi directly. In-fact, as we have covered, the release of Ethereum 2.0 will be far more impactful for the space, with the recent news that the blockchain’s deposit contract has accrued enough ETH to begin the shift from a proof-of-work to a proof-of-stake consensus mechanism to improve its scalability.
Nevertheless, the bitcoin boom of the past few weeks has had an impact on DeFi, with a number of tokens in the ecosystem enjoying sharp gains as strong sentiment seems to be heading into the entire sector. These tokens include Polkadot (DOT) which, as we covered in our post on the Uniswap decentralized exchange (DEX), is one of a couple of projects squaring up to Ethereum for DeFi market share. Over the past week, DOT is up 34%. while Yearn.finance, a hugely popular DeFi project, is up 66% in just seven days.
Tim Frost, founder of YIELD App, comments:
“The growth of DeFi over recent years and months has been incredible, shocking even die-hard believers like me. It’s not really surprising, though, as cryptocurrency users have been crying out for ways to save and invest in crypto since bitcoin emerged more than ten years ago. While the latest pump in the biggest cryptocurrency is great to see — frankly — DeFi is already a step ahead.”
Bitcoin and DeFi long-term
As bitcoin flies, then, trading volume across digital assets and digital markets is through the roof. This includes, notably, the long beleaguered XRP, which has seen an astounding increase in the past few days (+146% 17–24 Nov.). Of course, this rising value might not be all good news. Any half-sensible crypto currency trading investor should be bracing for the pullback from this new high. This fall in markets will come and — if past data is anything to go by — will hurt.
While the rising tide has lifted a number of altcoins in DeFi though, the waning swell is less likely to impact total value locked in the ecosystem — at least not as severely as it will surely hit non-DeFi coins and tokens. If the current bitcoin pump follows old trends, the majority of speculative investor money is likely flying in to the big name coins (like XRP, for example), and will soon flow out.
Meanwhile, DeFi remains an area open to investors interested in moving away from fiat currencies and into a new world of innovative finance projects made with user experience in mind. These projects are truly working toward the open source, fully accessible financial system that Satoshi imagined, and we’ll keep doing that work long after this current pump is done.