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Hype-driven bubble: big correction shows DeFi tokens are overvalued

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Bubble Burst
Mark Watson (Flickr)

The DeFi sector continues to grow in popularity and has especially seen rapid growth in 2020. Numerous DeFi-related assets such as Chainlink, LEND, and MKR have managed to earn the attention of a significant number of crypto investors, thereby, propelling these digital assets to record highs. 

However, the crypto markets appear to be headed into correction seasons, following several weeks of substantial gains. Bitcoin and Ethereum, along with other assets in the DeFi Ecosystem and the crypto market in general, have taken a bit of a hit. 

DeFi’s Initial Pump And Subsequent Dump

The DeFi sector had experienced a heavy boom since the beginning of the year and especially within the last couple of months, up until just a few days ago. As at earlier this month, there was a record of over $9 billion locked in the DeFi markets, an impressive 700% boom from the records from early June. It is extremely astonishing to see how much ETH has been locked up in DeFi in a considerably brief period of time.

However, the past few days have been trying times for cryptocurrency markets in general, and DeFi in particular, as it sees its first major correction. At the time of writing, the total value locked (TVL) in Defi, according to DeFi pulse, is $7.8 billion, a 22% downward slide from the $9.5 billion recorded on the 2nd of September. 

Total value locked in DeFi (DeFi Pulse)

 

The drastic drop in the Total Value Locked (TVL) of digital assets locked in DeFi, coincides with the market sell off that saw Bitcoin fall from $12k levels to retest $10k. One logical theory as to this fall in Bitcoin is its correlation to the stock market which has also experienced considerable losses in the past week. BTC’s drop could be reflecting a drop in traditional stock prices.

READ ALSO: What is DeFi? The Complete Guide to Decentralized Finance

Also, Ethereum, the backbone of DeFi, was equally impacted by the fall of bitcoin, due to its correlation to BTC. Consequently, the drop in ETH’s price also seems to have spread to other assets in the DeFi ecosystem. 

The SushiSwap Debacle

Beyond possible correlations with BTC and ETH, price drops in the DeFi tokens might have a very big connection with the recent events connected to SushiSwap.  This would include an alleged exit scam of a one-week old project and the hand over of admin function.

Sushiswap is a decentralized exchange protocol that works without an order book. It is a fork of Uniswap although unlike Uniswap, it includes a token, “SUSHI”. 

Chef Nomi of Sushi has admitted via a thread on Twitter, to having sold his SUSHI bag for approximately $11 million in Ethereum.  He stated in the tweet that he did it for the community. Also true to his words, he has made a move to transfer admin control of SushiSwap to FTX and SBF CEO, Sam Bankman-Fried. 

The SushiSwap debacle might have hastened the sudden exit of investors from the DeFi space, as yield farmers most likely concluded it was time to exit in order to save their profits. 

Should We Expect Another Bull Momentum Or The Burst Has Happened?

Beyond the earlier stated points, price drops in the DeFi token space appears to be the result of price corrections that have been anticipated for quite a while. Clearly, it looks like DeFi markets have possibly entered some kind of an inflection point, though, in the future, further growth and additional corrections are definitely expected.

The recent downslide of the DeFi market is a strong reminder that while DeFi is incredibly exciting in the long term, it is still very much in the early experimental phase. Greater returns may mean even greater dangers in DeFi as several of these projects are still uncertain, carrying collateral and volatility risks with them.

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Market Watch

Jack Dorsey‘s Square to develop open source Bitcoin mining

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Jack Dorsey Bitcoin

On Friday, October 15, Twitter CEO Jack Dorsey announced that American fintech company, Square, would be looking to get into Bitcoin mining. Jack Dorsey who is also Square’s CEO announced this on Twitter which subsequently sent waves through the bitcoin market, surging its price to almost a record high, rising over $62,000 over the weekend. According to the Twitter boss, Square is looking to building an open source Bitcoin mining system that would be available to individuals and businesses.

Sharing his thoughts further on the initiative, he stated that “Mining needs to be more distributed” and that “the more decentralized [mining] is, the more resilient the Bitcoin network becomes. He also mentioned the apparent inaccessibility of mining stating that “Bitcoin mining should be as easy as plugging a rig into a power source.

Dorsey also believes that bitcoin mining “needs to be more efficient and that “clean and efficient energy use” would be undoubtedly beneficial to the digital currency in the long run.

Dorsey ended the thread by saying that a “technical investigation would be undertaken by a Square team led by Jesse Dorogusker, Square’s hardware lead. If successful, this initiative would be another of Square’s bitcoin focused projects which includes a Bitcoin hardware wallet.

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Understanding Speculation and Crypto Volatility

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Everyone who dabbles in the crypto industry learns almost immediately that the market is very volatile and oftentimes things can change very quickly. That volatility is the fundamental reason why some investors make absolutely stunning gains in so short a time and others lose a lot of money as well. Trading in crypto is one of the riskiest ventures any person can undertake and as they say, it’s not for the faint of heart. The risks can be mitigated of course and sometimes depends specifically on the coin or crypto asset being traded on, barring general market trends.

Nevertheless, to get to the bottom of the volatility concept, one must understand speculation in the market. To start off, the concept of speculation isn’t limited to cryptocurrencies, on the contrary, speculation has existed for as long as economics and trading has. But it is worth saying that speculation is often a feature of novel sectors, assets, commodities and the like. So, even though cryptocurrencies have been around for more than a decade, they’re still in their infancy as far as markets go. One could say that the market is still trying to find its feet.

One of the fundamental reasons why cryptocurrencies are so volatile is that they are fundamentally backed by nothing of value outside the attention that they get. Unlike many fiat currencies which are either pegged to another currency’s value or whose value is unilaterally determined by a central authority, cryptocurrencies only derive value as a function of how many people are willing to use is to transact, i.e. trust in the asset because other people trust it. As a rule of thumb, the larger the number of people who accept the asset, the more valuable it becomes.

This is one of the hallmarks of speculative trading. In the crypto world or in any market that’s novel and untested, many people are in it to win it which means their strategies in trade has the objective of making as much profits as possible in the short term. Therefore, the market enters a subtly dangerous cycle of rapidly changing prices of assets. Basically, investors typically buy assets when prices are low and wait. As more investors are attracted to the commodity for its low prices, it sets off a cascade where more people buy in, causing the price to steadily rise. 

However, all good things must come to an end and it almost always gets to a breaking point whereupon the price gets high enough for investors to begin to sell. This reverses the earlier cascade and as more and more investors pull out, the prices can fall dramatically causing even more to sell off in fear of losing whatever investments they have left. The prices having fallen resets the game and primes investors to begin buying again.

Volatility has been one of the talking points of many critics of cryptocurrencies often comparing it to a Ponzi scheme. And in certain cases, persons of interest with large pulls and audiences can substantially affect the rate at which prices rise and fall. Other factors include government regulations. Volatility at its core reflects the often chaotic nature of trade and market interactions and human hopes and fears.

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Market Watch

What China’s crypto clampdown means for investors

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Over the weekend, China, the biggest crypto mining country once again, began to clamp down on cryptocurrency. Ten Chinese agencies including the central bank and banking, securities and foreign exchange regulators have vowed to work hand in hand to expose illegal cryptocurrency activity.

China has always placed stricter rules on cryptocurrencies but the new rule has made all crypto-related activities illegal. According to the People’s Bank of China (PBOC), it is illegal to cryptocurrency trading and anyone that does so will be severely punished; this includes those within China that are working for overseas platforms. To fully phase out the cryptocurrency mining sector, the National Development and Reform Council (NDRC) said that it would launch a nationwide crackdown on cryptocurrency.

Over the years, China does not recognize cryptocurrency as a legal tender. In 2013, the Chinese government referred to Bitcoin as a virtual commodity that individuals are allowed to freely participate in. This freedom, however, precludes banks and payment companies from providing services that are Bitcoin related.

In 2017, Initial Coin Offering (ICO) was banned. The ban was also extended to the conversion of legal tenders to cryptocurrencies by trading platforms which led most of the platforms to shut down operations in China. The crackdown led 88 trading platforms and 85 ICO platforms to withdraw from the market as of July 2018.

To China, the crackdown on cryptocurrency is necessary as the country is trying to launch its official digital currency and the need to fulfil its 2060 climate targets. The crackdown was necessary as cryptocurrency was seen as infringing on people’s properties and ‘disrupting the normal economic order.’

The statement by PBOC on Friday was unequivocal as the current crackdown is distinct from the previous ones. In his statement on Friday, PBOC called Bitcoin, Ether and Tether ‘legally irreparable’ and should not be used. The new regulations forbid financial institutions, marketing and IT providers from supporting crypto-related activities. The activities of both crypto holders and miners are now considered illegal. This is what Henri Arslanian, a PwC crypto leader termed as “No ambiguity. No room for discussion. No grey areas” in his tweet.  

What does this mean for crypto holders worldwide?

The major effect of China’s crackdown on cryptocurrency is the increase in price volatility. While volatility is a common phenomenon in the crypto world, a crackdown initiated by the world biggest cryptocurrency mining country will have a huge effect on market price.    

After the PBOC interview, Bitcoin fell by 4% within 24 hours and is currently trading at $43,320. Ethereum fell by 6% and it is currently trading at $3,036. With the Evergrande debt crisis and the huge blow bedevilling the crypto market, a clampdown by China would most likely keep the market price on the red until another good news crops up.

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