The basics are good, but the price drops all the way. Is DeFi underestimated?

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Three catalysts may drive the DeFi market to rebound: the low risk-reward ratio of short positions, the continuous increase in the total value of lock-in, and the extreme negative sentiment surrounding the DeFi market.

Original title: ” Major DeFi tokens plummeted by 50% in October-3 reasons why the rescue rebound may come
Written by Joseph Young
This article is authorized to reprint from LongHash to Chain Wen

Throughout October, the Decentralized Financial Market (DeFi) can be said to have gone through hardships. Despite the strong rise of Bitcoin, DeFi tokens have fallen into a dilemma without any signs of rebound.

The basics are good, but the price drops all the way. Is DeFi underestimated?

After a month of corrections, there are three catalysts that may drive the DeFi market’s rescue rebound: the low risk-reward ratio of DeFi shorts, the continuous increase in the total locked value (TVL) in the DeFi agreement, and the extreme negative sentiment surrounding the DeFi market .

Market sentiment is becoming extremely negative

In October, the top 3 DeFi tokens Chainlink (LINL), Wrapped Bitcoin (wBTC), and Maker (MKR) performed slightly better than other DeFi tokens.

According to the market price on Binance, Chainlink, the No. 1 DeFi token by market value, rose by 13% in October. Maker (MKR) fell by 8%, compared to other major DeFi tokens, MKR’s decline has been much smaller. Since wBTC is a token that reflects the value of BTC on Ethereum, it will follow the price of BTC.

However, in addition to the above three tokens, the prices of the main DeFi tokens have experienced a big plunge. Below is the performance of YFI, UNI, COMP, and UMA—DeFi tokens with market capitalization after TOP 3—from October 1 to 31:

  • YFI: $23,858 to $10,492

  • UNI: $4.1554 to $2.2662

  • COMP: $133.80 to $90.83

  • UMA: $8.878 to $6.738

The basics are good, but the price drops all the way. Is DeFi underestimated?

Due to the weak performance of DeFi tokens in October, sentiment surrounding the market has become increasingly negative. When market sentiment is excessively negative, the chance of trend reversal increases.

This is a typical feature of past price cycles in the cryptocurrency market. In March 2020, when Bitcoin plunged below $3,600 on BitMEX, market sentiment reached its lowest point. Traders in the futures market withdrew on a large scale, but the trading volume in the spot market began to increase. This marked the bottom of Bitcoin at the time and caused it to rebound in the next 6 months.

Matt Kaye, the managing partner of Blockhead Capital, declared that as the market ushered in “extremely negative sentiment,” the DeFi market is showing signs of recovery. The investor specifically pointed out the increase in the trading volume of other DeFi tokens with larger market capitalization such as YFI and SNX in the spot market.

In crypto trading, the spot market refers to the currency and fiat currency exchange cryptocurrency market that does not provide leverage or margin services. Investors can buy and sell cryptocurrencies, but they cannot borrow funds for high-risk transactions like in the derivatives market. The growth of the spot market volume usually points to the real growth of retail demand.

DeFi fundamentals are not affected

In addition to the continued growth in trading volume, the fundamentals of the DeFi agreement remain strong. The total value (TVL) locked in the DeFi agreement is still about 11 billion US dollars.

This means that approximately $11 billion of capital is active in the DeFi protocol, most of which is in wBTC and ETH.

On September 1, when the market price of most DeFi tokens peaked, DeFi’s TVL was 9.66 billion U.S. dollars. In fact, since then, even though DeFi tokens have experienced a callback, the value locked in DeFi has grown.

The basics are good, but the price drops all the way. Is DeFi underestimated?

Shorting DeFi is no longer attractive

In October, shorting DeFi or reverse betting on DeFi tokens is very attractive. As the price of Bitcoin rose, it sucked most of the trading volume in the cryptocurrency market, bringing the altcoin to a standstill.

However, considering the risk-reward ratio, shorting DeFi is no longer so attractive. In the past two months, many DeFi tokens have fallen by 40%-70%, and the room for a sharp drop has been much smaller.

Since September, Su Zhu, CEO of Three Arrows Capital, has been expressing his optimism about Bitcoin and his doubts about the short-term prospects of the DeFi market, noting:

“Important update: I don’t think there is a good risk-reward ratio for short DeFi against the US dollar. It is reasonable to go long DeFi/ETH cross trading. Top projects are reaching the level where long-term investors will plan to deploy fiat currencies. I think the next few days Within a month, 95% of the currency pair BTC prices will fall.”

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