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When the last Crypto Bull Becomes a Bear

  • Possibility of further selling in cryptocurrencies even as the last bull looks to become a bear as leverage and interdependence in decentralized finance has yet to fully run its course. 
  • Signs that even long-term holders of cryptocurrencies are now selling means that the selling pressure will have some ways to run before coming to an end.

It’s been said that markets have bottomed out when the last bull becomes a bear and signs of capitulation are showing up everywhere in the cryptocurrency markets.

While short-term speculators may have been the first to show up their “paper hands,” even so-called “diamond hands” haven’t been immune to the latest market machinations.

Data from blockchain analytics provider Glassnode, suggests that the spent output profit ration (a measure which tracks profit realized from cryptocurrency market activity per day) has sunk to its lowest level within a year, suggesting that even the most die-hard cryptocurrency investors are starting to feel some pressure to sell.

Long-term investors typically store cryptocurrencies on cold wallets, expecting to hold it there for a long time, but recent blockchain activity has seen large inflows of cryptocurrencies onto exchanges as a sign of selling pressure, and especially from older wallet addresses commonly associated with long-term holders.

While tighter monetary policy has been provided as a primary reason for the selloff in risk assets, and cryptocurrencies have been no exception, the recent steep plunge has had to do with cascading defaults from a handful of major players in the cryptocurrency sector.

Massive centralized lenders like Celsius Network, BlockFi and Babel Finance have either frozen withdrawals (a sure sign of trouble) or are rumored to be facing liquidity issues, while even marquee cryptocurrency hedge funds like Three Arrows Capital are now facing insolvency.

The deleveraging of the cryptocurrency sector has rattled even the staunchest supporters, including investors who have been holding on to their bags for years.

Bitcoin is now down about 50% this year alone, with the token powering the majority of blockchains, Ether, falling 70%.

Despite optimism over Ether’s impending shift to a more energy efficient Proof-of-Stake blockchain, its intimate tie with decentralized finance has seen the token’s price whacked through the cascading and interlinked liquidations.

As it turns out, much of DeFi’s yield was generated from a seemingly endless revolving line of credit from interlinked lending pools where speculators supercharged their bets on cryptocurrency prices going one way only.

The current deleveraging cycle isn’t complete as it’s as yet unclear the extent of the impact of unwinding of interlinked synthetic derivatives in the DeFi space and which lenders have become insolvent as a result.

In the coming weeks and months, more centralized lenders can be expected to show signs of strain and liquidity issues, which will have an impact on the DeFi pools that they operate in.

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© Copyright of Novum Global Consultancy Pte Ltd {2020, 2021}. All rights reserved.

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