Ethereum Rally Fuelled by DeFi, Can Bitcoin Get Some of This Fuel Too?
Ethereum (ETH) rally has been fuelled by decentralized finance (DeFi), but what if there were a simpler way to use bitcoin (BTC) in DeFi too - the yield opportunity would lead to more demand and to institutional levels of capital, according to blockchain analysis firm Chainalysis' chief economist.
At 11:00 UTC, ETH is trading at USD 1,398, after it had hit an anticipated all-time high of almost USD 1,450 earlier in the day. BTC is changing hands at USD 33,079, after recently breaking its own series of records then correcting downwards. That said, ETH has outperformed BTC, having increased 4.5% in a day to BTC's 1%; 14% in a week to BTC's drop of almost 9%; as well as 124% in a month to BTC's 33%.
"Ethereum reached an all-time high because of demand to use it as collateral in DeFi, while bitcoin reached an all-time high because of demand from new, large investors. The assets currently have different use cases," Chainalysis Chief Economist Philip Gradwell said in his latest report.
This ethereum’s experience is also relevant as it raises the question of what would happen if bitcoin could more easily be used in DeFi, said Gradwell, adding that it suggests future competition between the two biggest projects in the crypto space. "If Ethereum can reach an all-time high price by offering access to yield, then imagine what would happen if investors could receive a yield on their bitcoin," he said.
Furthermore, as "far more capital" is available in bitcoin than in ethereum, should DeFi start using the former, "liquidity would boom." Though wrapped bitcoin (WBTC) exists for this purpose, the adoption has been low so far, argued the report, adding that there is a gap in the market for institutional DeFi.
That's where ethereum's situation is crucial for another major point. While there is a risk to the price that could come with the greater use of bitcoin in DeFi, "as it could import DeFi’s volatility to an asset with a reputation as a safe haven," argued Gradwell, now "ethereum’s example suggests that the extra demand for bitcoin that could arise from a DeFi use case would increase the price and likely outweigh that risk." The opportunity for yield would create extra demand and bring institutional levels of capital into DeFi, he said.
Dumping and exhaustion
Meanwhile, Grayscale Bitcoin Trust (GBTC) dropped over 15% last week, resulting in GBTC’s premium to its underlying holdings dropping to 2.8%, the lowest since March 2017, Bloomberg reported. "When there is a big move to the downside, bids tend to drop and that premium ends up collapsing because investors are trying to get out of positions," WallachBeth Capital's director of ETFs Mohit Bajaj is quoted as saying.
Meanwhile, per the JPMorgan strategists cited by Bloomberg, GBTC slid 22% over the past two weeks through January 22, while the pace of flows into the Trust "appears to have peaked" based on four-week rolling averages. The institutional flow impulse behind the Trust is not strong enough at this moment for BTC to break out above USD 40,000, the strategists said, adding that the "risk is that momentum traders will continue to unwind bitcoin futures positions."
Meanwhile, an analysis by crypto exchange OKEx found that long-term BTC holders - namely "OG whales" and BTC miners - sold into institutional purchases at the end of 2020. "In other words, old-school bitcoiners sold some of their old bags to new institutional buyers with extremely large new bags to fill — for better or worse," it said.
Furthermore, analysts at QCP Capital noted signs of "institutional exhaustion," arguing that the strength in the US trading session "has lost momentum for the first time" providing a "clear sign of exhaustion in demand from the US institutions and corporates who have been the primary drivers of this bull run."
Nonetheless, there's some data suggesting that institutions keep on buying - despite the volatility. As the Cryptoverse points to the bitcoin realized volatility climbing to the highest level since the infamous 2020 March crash, on-chain data site Glassnode shows the number of whales growing - the number of addresses with BTC 1,000 or more grew since the start of this year.
"The short term conditions for price volatility strengthened last week, with inflows to exchanges declining, a bullish signal, but exchange balances increasing and trade intensity declining, bearish signals. Profit-taking by new buyers eased this week but remains high, suggesting that price volatility will continue into the medium term," concluded Gradwell.
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(Updated at 15:38 UTC with a video).