Different fundamentals are at play for the second-largest crypto when it comes to the recent price gains
We have only been three weeks into 2021 and already it has broken some records for the Crypto market — Bitcoin posted an all-time high (ATH) of almost $42k on Jan. 07, followed by Ether charting its ATH around $1440 on Jan. 18 and now the total value locked (TVL) in Defi assets crossed the $25 billion mark. Interestingly, the last two are a little more correlated than the first one.
Let me explain how. The second-largest crypto is primarily used as a collateral asset for borrowing & lending in the decentralized finance (DeFi) market, apart from being the primary home base for smart contracts & decentralized applications (dApps). It is this unique set of use cases that drives the interest of investors and traders in ETH.
It was only recently that I wrote about how it was Ethereum’s turn to climb higher. And one of the reasons mentioned was the Defi boom that has taken shape in the past 12 months or so. Although there is no denying the fact that Bitcoin drives the broader crypto market, we are also seeing divergent use case narrative play out in individual cryptos as is the case with Ethereum.
While Bitcoin was receding from its ATH, Ethereum propelled higher to its ATH. An interesting question that is now being raised by some is, what would happen if bitcoin could more easily be used in DeFi — would the premier digital coin infringe on ETH’s territory? For now, price volatility is the running theme in cryptos as the wild swings continue to dominate the digital market.
According to the Chainalysis Market Intel, The short term conditions for price volatility strengthened last week. inflows to exchanges fell 11% and median trade intensity was down 6% in the last seven days as compared to the prior seven days, although Ethereum exchange balances only increased in recent days after initial declines. The data suggests while volatility may continue for a little longer but the profit-taking may be easing off.
Overall, there was a decrease in the number of Ethereum being sent out to exchanges in the week of Jan. 11 as compared to Jan. 04–12.3 million as compared to only 946k respectively. Ethereum profit-taking by new buyers is still relatively high, coming in at 49% above the adjusted 13-week average. As evident, while the new buyer behavior is driving the market sentiment, profit-taking behavior which emerged at the start of 2021 seems to be tapering down.
Let’s dissect the information a little further. The left chart above (Figure 1) suggests that 54% of the Ethereum has been held for less than a year, ETH held for less than a month has seen a stupendous increase of 357% since the beginning of 2020. The tug of war between the traders and investors is behind the price action we are seeing in ETH — traders are short term players, who circulate on average at least 25% of the assets they receive, whereas investors send on average less than 25% of the assets they receive.
According to the second chart above (right), 72% of Ethereum held for less than one month is held by traders, and 79% of the growth in 2020 of such Ethereum has come from traders. Data from both charts suggests that unlike Bitcoin where large institutional investors are the driving force behind the massive gains, short-term traders are driving that narrative in ETH — being used in DeFi.
Ethereum is riding high on the yield that it offers in the DeFi market. Just imagine what could Bitcoin do to the liquidity of the DeFi boom with the abundance of institutional capital. Although wrapped bitcoin (WBTC) is being used to access the DeFi market, the adoption has been sluggish so far. I would believe it would be better for the mainstream to sink in the safe heaven narrative a little more before another avenue opens up. Ethereum is taking care of things right now on that front.
Originally Published on Medium