First Mover: Bitcoin Rally Stalls as 'DeFi Summer' Proves Endless
 December 18, 2020  Everything you need to make sense of the crypto markets and beyond Sponsored By:  By the CoinDesk Markets Team Edited by Bradley Keoun If you were forwarded this newsletter and would like to receive it, sign up here. Bitcoin (BTC) +0.3% $22,866 Ether (ETH) +0.6% $648 (Price data as of Dec. 18 @13:34 UTC) TODAY:
Price Point Bitcoin (BTC) was little changed after climbing for six straight days, though prices appeared unable to hold fresh highs above $23K.
"The market has paused for a bit to consolidate," Joe DiPasquale, CEO of the cryptocurrency hedge fund BitBull Capital, told First Mover in an email. "This is normal behavior after major surges as market participants take profits and await the next big move up or down."
In traditional markets, European stocks fluctuated as Brexit talks stalled. U.S. stock futures were steady as lawmakers worked to complete a pandemic-relief deal. Gold weakened 0.3% to $1,880 an ounce.
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Market Moves (Editor's note: This is the fifth installment of First Mover's recap of how the bitcoin market evolved over the course of 2020 and what it means for the future. Today we cover the period from June through September, when an explosion in innovation in the fast-growing cryptocurrency subsector of decentralized finance, or DeFi, diverted eyeballs – and capital – away from bitcoin.) At the end of May, bitcoin prices were sitting on a 35% year-to-date gain, following a series of wild market gyrations during an undeniably tumultuous and horrific year. With the coronavirus-racked U.S. economy suffering its worst contraction since the Great Depression, not even the bulls were in a mind to complain; the Standard & Poor's 500 Index of U.S. stocks was down more than 6%.
But then, suddenly, the bitcoin market went cold. And that's when the summer of DeFi began.
Decentralized finance ("DeFi") is a subsector of the digital-asset industry where entrepreneurs are building semi-autonomous lending and trading systems atop decentralized networks, primarily the Ethereum blockchain. The goal is to create alternatives to the big banks and trading firms that are centrally managed by human executives and boards of directors in places like New York, London and Tokyo. The idea is that the distributed, computer-based versions of crucial financial-system infrastructure should be fairer and more efficient to use than their old-world counterparts.
The first sign of the DeFi frenzy arrived in mid-June, when the autonomous lending platform Compound, started in 2017, released its proprietary COMP tokens for public trading in digital-asset markets. At the time, users had socked some $163 million of collateral into the project in exchange for loans. But what got everyone's attention was a flurry of trading in the tokens that suddenly gave Compound a market capitalization of nearly $785 million.
Compound's outsize market cap, relative to the total value locked in the protocol, "may signal the rally went too far," The Defiant, a newsletter tracking the DeFi sector, wrote on June 16.
Even Compound's 35-year-old founder Robert Leshner, acknowledged the hysteria: "Because the asset was so new, there was a bit of a speculative fervor," Leshner told CoinDesk in an interview.
It was just the beginning. Two days later, according to the website DeFi Market Cap, the project's value had reached $2 billion – twice the amount that venture-capital investors consider the threshold for a "unicorn," a privately held startup with a value of at least $1 billion.
"DeFi is hitting its stride and the space will continue to accelerate," the research firm Delphi Digital wrote in a report.
And bitcoin? Suddenly an afterthought.
"It's surprising to see bitcoin be so boring given everything happening both within and outside the crypto industry," the digital-asset analysis firm Messari wrote in its daily email to subscribers.
In mid-July Messari published a chart showing the Ethereum blockchain's daily settlement value surging to about $2.5 billion, surpassing bitcoin's.  Chart of daily settlement value on the Ethereum vs. Bitcoin blockchains, as of July 21. (Messari) Suddenly prices were soaring for not just ether, the Ethereum blockchain's native cryptocurrency, but for a veritable parade of tokens associated with hitherto little-known DeFi projects like Aave, Chainlink, Curve and good-luck-explaining-this-to-your-friends outliers like Yam and Spaghetti.
Traditional investment analysts and Wall Street Journal columnists were now asserting matter-of-factly that U.S. stocks were merely being propped up by the Federal Reserve's $3 trillion of money-printing. So the DeFi explosion raised the question among crypto-industry analysts began wondering whether digital-asset markets had become the new home of capitalism.
"Every derivatives trader that was looking for incremental yield and levered returns has been besotted by the magnitude of moves in DeFi," Viashl Shah, founder of derivatives exchange Alpha5, told CoinDesk at the time. "So, naturally, cost of capital dictates at least some attention that way."
Big cryptocurrency exchanges like Binance started rolling out DeFi-related offerings to supplement their bitcoin-denominated trading operations. Yearn.finance, a just-invented protocol designed to steer users toward the highest-yielding DeFi projects, saw prices for its YFI token jump 8-fold in August alone.
The headlines just kept getting zanier and more incomprehensible, and even old crypto pros could barely keep up. A decentralized project called SushiSwap mounted what was described as a "vampire mining attack" to suck some $800 million of liquidity from another decentralized trading protocol called Uniswap, as reported at the time by CoinDesk's Brady Dale.
Weeks later, Uniswap made a surprise delivery of its UNI tokens to anyone who had ever used the platform, worth at least $1,200 in market value – prompting some witty commentators to call it "stimulus for Ethereum users," since it was the same amount as the coronavirus aid checks mailed out earlier in the year by the U.S. Treasury Department. Seemingly out of nowhere, and without the usual hype and press coverage that comes with a big initial public stock offering, Uniswap had a $5 billion valuation.
Among digital-asset traders, bitcoin looked to be on the defensive, described as a "pet rock," since so little of the fast-paced DeFi development was taking place on its blockchain. Some bitcoin traders started converting their holdings into freshly minted digital tokens so that the "tokenized" versions of the cryptocurrency could be deposited on DeFi protocols in exchange for juicy interest rates.  Total collateral locked into DeFi protocols has surged from less than $1 billion at the start of 2020 to more than $15 billion now. (DeFi Pulse) Yet in hindsight, the summer of DeFi galvanized bitcoin's appeal on a variety of fronts.
For one, it reinforced the reality that while bitcoin was the oldest and biggest cryptocurrency, it was hardly the most interesting. The digital-asset industry and market infrastructure had matured to the point that the competition looked genuine; rival projects were proving capable of fast-paced innovation, disruption and growth.
"In 2020, DeFi put in place the building blocks for an entirely new financial system: payments, lending, asset issuance, and exchange," Messari's Ryan Selkis wrote on Dec. 15.
The bullish twist was that bitcoin, as the first purchase for many cryptocurrency buyers, might be the gateway to a far-more lucrative industry than previously imagined.
The DeFi frenzy also sharpened many investors' focus on what might be bitcoin's most-compelling use case – as a tool for hedging against central-bank money printing.
As the rest of the year would demonstrate, that "digital gold" narrative would prove enticing enough to big Wall Street firms and money managers to send bitcoin prices to a new all-time high. A pet rock, but apparently pretty cute. - Bradley Keoun
Bitcoin Watch  Chart shows number of bitcoin whale entities at record highs. (Glassnode) Bitcoin was consolidating in the range of $22,300 to $21,500 on Friday. Bulls look to be taking a hiatus, having engineered a rally of more than $4,500 to a record price of $23,370 in the past two days.
The recent rally above $20,000 is accompanied by an increase in bitcoin "whales" – large investors with an ability to influence market trends.
As of Thursday, the population of whale entities – clusters of addresses held by a single network participant holding at least 1,000 BTC – was 2,001, the highest on record, according to data source Glassnode. The previous lifetime high of 1,992 was recorded on Dec. 4.
The number of whale entities has gone up by 16% this year, while bitcoin's price has rallied by 220%.
The data validate the popular argument that increased participation by big investors has propelled bitcoin higher. High-net-worth individuals are increasingly considering bitcoin a hedge against inflation, according to Willy Woo, an on-chain analyst and the author of The Bitcoin Forecast newsletter.
The rally looks sustainable as it is backed by strong hands. There seems to be a consensus in the market that 2021 could bring more significant gains. To cater to the bullish sentiment, Deribit, the world's largest crypto options exchange by trading volumes and open interest, has listed call options at the $100,000 strike price expiring on Sept. 24, 2021.
Token Watch Ether (ETH): More than $1B staked on Ethereum 2.0.
Compound (COMP): Token prices surge as new white paper outlines plans for blockchain to accomodate central bank digital currencies.
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