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Without DeFi support, Bitcoin price could plummet

TL;DR

Bitcoin price is showing no movement for the past few days. The muted price action has saddened many onlookers who were expecting the price to move upwards after the halving event. However, the analysts are ignoring one fundamental phenomenon that is helping BTC sustain current price levels – the DeFi explosion.

The rise of DeFi is contributing significant value to the current Bitcoin story. Without this support, Bitcoin price could plummet well below its past three-month average. There has been a marked increase in ‘decentralized Finance’ applications, including derivatives, payments, lending, and decentralized exchanges. The current exuberance in the DeFi realm means that new tokens are vulnerable to boom-bust cycles. Bitcoin emerges as a savior in this scenario.

Bitcoin price supported by growth in DeFi

A prime example of the vulnerable boom-bust cycles is the liquidity mining phenomenon. It is an incentive program that attracts new users (to pump in fresh liquidity) and rewards them with governance tokens. Such orchestrated growth hacks often lead to unnatural spikes in the DeFi market. Another instance is that of Compound governance tokens that significantly boosted its market cap and value locked.

The newly inducted users, known as yield farmers, have to join the network either as a lender or borrower. Therefore, they need to make a deposit into the system to continue their activity. Currently, ETH has the most significant value locked. However, WBTC is the most talked-about token on Ethereum. Wrapper BTC, or WBTC, saw massive interest from yield farmers, which in turn also boosted their participation in the Compound network.

As the Bitcoin value locked in DeFi increases over time, the trading supply of Bitcoin is diminishing. This decline is further buoying the Bitcoin price.

The impressive growth of DeFi sector

DeFi realm is witnessing significant growth and is coinciding with the current ‘alt season.’ DeFi is also being credited with the rise in the price of altcoins. BTC is paired with many altcoins, which contributes to its value in the trading arena. This fundamental linkage gives subtle support to the Bitcoin price.

Even though DeFi has undergone tremendous success in the past three months, it also poses risks. The flexible characteristic of crypto means that rising value locked figures can soon reverse. This can have a spillover effect on the Bitcoin price. Such a scenario can pose a danger to the booming alt season.

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Gurpreet Thind

Gurpreet Thind is pursuing Masters in Electrical Engineering at University of Ottawa. His scholarly interests include IT, computer languages and cryptocurrencies. With a special interest in blockchain powered architectures, he seeks to explore the societal impact of digital currencies as finance of the future. He is passionate about learning new languages, cultures and social media.

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