YFI, AAVE, COMP are down 10% – 3 reasons DeFi sees a huge correction


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The main decentralized financial brands (DeFi) Yearn.finance (YFI), AAVE and Compound (COMP) have plummeted in the past 24 hours. The three DeFi tokens valued well over USD 500 million fell over 10% that day.

Yearn.finance, AAVE, COMP 15-minute chart (Binance). Source: TradingView.com

Three reasons why DeFi-related cryptocurrencies have been withdrawn particularly heavily are the low volume, the falling price of Ether (ETH) and the uncertainty surrounding Bitcoin (BTC).

Even top DeFi tokens such as YFI and AAVE have a comparatively low volume

Compared to major cryptocurrencies like Bitcoin and Ether, DeFi tokens have a relatively small volume. This means that if Bitcoin is corrected, there is a risk of larger withdrawals on tokens of lower volume.

In the past few weeks, DeFi tokens have shown signs of a lower correlation between Bitcoin and Ether, according to the pseudonymous trader “CryptoGainz”. Regardless of whether the cryptocurrency market is in risk-on mode or risk-off mode, the DeFi market rebounded strongly in December. The dealer said:

“DeFi is decoupled from BTC and ethics. These assets aren’t that liquid and they get a lot of interest from human money that doesn’t.” [care] about whether or not the rest of the crypto is at risk. “

However, short-term investors may have felt compelled to sell DeFi tokens as Bitcoin and Ether fell nearly 10% in two days.

The timing of the Bitcoin price decline coincided with the correction of the DeFi market on December 11th. As the BTC price began to decline from $ 18,400, leading DeFi tokens also began to correct.

YFI, for example the governance token of the Yearn.finance DeFi protocol, is down 12% in the last 12 hours. Bitcoin price fell 4.6% over the same period.

The sharp correction in DeFi assets is surprising given its recent momentum. As an example, Cointelegraph reported that COMP gained 56% in a week as the amount of capital set in the Compound Protocol increased.

Ethereum’s momentum is slowing down

Although the impact of Ether price on the DeFi market varies from protocol to protocol, the value of Ether has a huge impact on the entire DeFi market.

Most DeFi protocols revolve around investors lending and borrowing capital with Ether as collateral. Of course, if the price of Ether drops sharply, the Total Locked-in Value (TVL) in DeFi would fall.

According to data from Defipulse.com, the TVL on all DeFi logs has decreased from $ 15.16 billion to $ 13.97 billion in the past four days. The sharp drop in TVL coincides with the moment the DeFi assets were corrected.

The total value locked in DeFi. Source: Defipulse.com

Bitcoin price uncertainty

In the short term, traders are cautious about the price development of Bitcoin. As Cointelegraph reported, the imbalance in the Bitcoin options market will favor bears or sellers for the foreseeable future.

The combination of miners selling large amounts of bitcoin that has not been seen since 2017 and the unbalanced market for bitcoin options creates increased uncertainty in the market.

At the same time, it is also possible that DeFi can pre-execute Bitcoin to restore it in the near future. CryptoGainz notes that DeFi altcoins with “strong narratives” attract long-term value investors. The trader argues:

“I have no idea how funds determine coin valuation, but there must be significant benefits from here as they accumulate aggressively and not take risks.”