Analysis & Opinions

The Diverging Paths of Bitcoin & DeFi: A Data Perspective by IntoTheBlock

Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry. 

This week we cover Bitcoin’s growth as it surpasses $13K and grows its market dominance to over 60%. We go over the remarkable news from PayPal and JPMorgan, and the implications these have had on blockchain and derivatives market data. As well, we go over the recent DeFi hack and how DeFi tokens continue to underperform.

Bitcoin Takes Off

Bitcoin has had an outstanding last couple of weeks. Bitcoin’s price is near two-year highs as several bullish news have catalyzed the move higher. IntoTheBlock had previously identified bullish momentum building up in early October. This momentum finally came into fruition as Bitcoin surpassed the $12K mark for the first time since July 2019. 

In terms of news, there has been no shortage in positive developments for Bitcoin. On October 21, PayPal confirmed they will be offering its 286 million users the ability to buy, sell and pay with cryptocurrencies, sending Bitcoin to new yearly highs. A few days later, long-time Bitcoin skeptic JPMorgan reversed its stance on the cryptocurrency claiming it has “considerable long-term upside potential” competing with gold as an alternative currency. More recently, DBS — Singapore’s largest bank —  is launching a crypto exchange (even if not quite yet).

While this news demonstrates the increased legitimacy of crypto in general, Bitcoin has benefited disproportionately. In fact, Bitcoin has been the best performing asset class throughout October.

By analyzing on-chain and derivatives markets data, we can observe that institutional interest has been leading the way in the recent Bitcoin rally. Throughout the last 12 months, transaction size and average Bitcoin address balance has been increasing, especially since August.

As of October 27, 2020 using IntoTheBlock’s Bitcoin financial metrics

Average transaction size has more than quadrupled since October 2019, pointing to the growing appetite for Bitcoin among institutional investors and whales. Similarly, the average balance of a Bitcoin address has been growing, outpacing price action. In Bitcoin terms, the average balance has grown nearly 20% from 0.48 BTC in October 2019 to 0.57 BTC in October 2020. This suggests addresses have been accumulating and large players have been skewing the balance distribution higher. 

Derivatives markets also paint a similar picture. Perpetual swaps’ open interest — which measures the total dollar value of open positions — have been suggesting growing demand among derivatives traders.

As of October 27, 2020 using IntoTheBlock’s Bitcoin derivatives analytics

The increase in open interest in tandem with price is a traditional signal pointing to confidence in the current market trend. This further solidifies the recent Bitcoin momentum stemming from large players and institutions. 

Overall, Bitcoin holders have enjoyed one of its best months in 2020. The recent run shows signs of support coming from institutional investors as recent news have helped boost Bitcoin’s legitimacy further. Ultimately, Bitcoin remains bullish as both on-chain and derivatives markets analytics highlight its growing appeal among whales and institutions. 

DeFi Suffers Another Hack & Continues Crashing

On the other hand, decentralized finance (DeFi) tokens have been struggling to recover since the September crash. While DeFi tokens took the spotlight in the summer, the market has not been in their favor with their tokens being some of the worst performing in October and September. When compared to Ethereum’s performance  — where most DeFi DApps are built on top of — DeFi governance tokens hit a monthly low.

As of October 27, 2020 using IntoTheBlock’s DeFi insights

The ratio of DeFi tokens’ market cap (excluding oracles) to Ethereum went from being around 25% in late August to just over 15%. During the same period, Ethereum has also dropped, meaning that DeFi tokens have fared relatively worse in the last couple of months. 

Recently, the DeFi space was also hit with negative news as Harvest.Finance, which had grown into one of the top 5 DeFi protocols by value locked, was exploited by anonymous attackers. As explained by Yearn’s founder Andre Cronje.

Source: Twitter

Essentially, the attacker exploited stablecoin pools as they drained their liquidity and was able to lower their price below peg and then profit from the difference. This resulted in the loss of the stablecoins provided by Harvest users in the USDT and USDC pools. Between $25-$34 million of user funds were lost, but the attacker seemingly could have profited from other stablecoin pools and oddly opted not to. Adding to this twist, the hacker returned $2.5 million of the stolen funds without any indication for their reasoning.

Harvest Finance subsequently lost 60% of its value locked, from over $1 billion to $430 million. A fraction of this was directly from the hackers withdrawn funds, but most due to users removing their funds following the incident considering how other pools were also vulnerable. The attack had wider implications throughout other DeFi protocols as the value locked in all of DeFi crashed by over $1 billion that day.

As of October 27, 2020 using IntoTheBlock’s DeFi insights

Harvest competitors such as Yearn also had a decrease in their value locked, pointing to general fear amongst DeFi users. This acts as the cherry on top for DeFi protocols’ recent trend as traders shift their attention to Bitcoin.

These hacks are nothing new to DeFi and it is important for users to consider these risks when interacting with protocols. While DeFi shows high potential long-term, it still faces roadblocks in regards to its security and scalability. There has been optimism with the latter as Ethereum approaches phase 0 of its ETH 2.0 upgrade. Ultimately, these issues and DeFi tokens recent performance point to the space still being in its early days, where activity is of higher risk but also potentially higher rewards.

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ITB is a tribe of data scientists, cryptocurrency experts and AI geeks that set out on a journey to unlock the mysteries of crypto assets and provide investors with relevant intelligence about the market.

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