DeFi poised for major comeback amid Bitcoin’s rally, predict Bernstein analysts

With Bitcoin nearing an all-time high amid strong exchange-traded fund inflows, analysts at research and brokerage firm Bernstein expect a “big bang” DeFi recovery to follow.

While the bitcoin rally can be attributed to the spot ETFs, following record highs for bitcoin above $69,000, a broader market recovery is expected to be led by the DeFi niche – accounting for six of the top 10 revenue-generating protocols. in crypto, Bernstein analysts Gautam Chhugani and Mahika Sapra wrote in a note on Monday.

The DeFi segment was “completely wiped out” in the last cycle, playing a game of unsustainable returns driven by subsidies from token incentives (inflation) that ultimately collapsed, the analysts argued.

This was illustrated by the collapse of the Terra ecosystem in May 2022, with the DeFi protocol Anchor once promising a 20% return on the stablecoin TerraUSD, backed by the Terra governance token Luna. When Luna’s token price crashed, the rest of the Terra ecosystem went with it, wiping out some $40 billion in investor wealth in a few days.

But this time the return is real, the analysts said, with value being built based on the fees generated by the underlying application. Chhugani and Sapra cited Uniswap as an example amid the recently proposed fee-sharing mechanism for UNI token stakers. The largest decentralized spot exchange generated $2 billion in trading volume in the last 24 hours – more than 50% of the trading volume of the centralized exchange Coinbase – and is the largest fee-generating DeFi protocol at around $3.7 million per day.

By sharing the fees to vote currently underway, it could “transform the token from a simple ‘voting’ token to a token with a revenue, earned via protocol user fees,” the analysts said, adding: “we expect multiple DeFi protocols to follow .”

Chhugani and Sapra noted concerns about the Securities and Exchange Commission’s suggestion that all cryptocurrencies, with the exception of bitcoin, could be securities — even though the crypto industry sees them as tokens tied to permissionless protocols without a specific investment contract.

“This is the fundamental question in the Coinbase versus SEC case, which names twelve tokens as securities and alleges that Coinbase is an unregistered securities exchange,” the Bernstein analysts said. “Given that the courts in recent times have typically applied more nuance than the SEC’s general arguments (as seen in the Ripple vs SEC case), we believe the crypto industry sees an opportunity to challenge the ‘legal’ narrative on tokens change.” Bernstein has a 15% allocation to DeFi in its digital asset portfolio – up 15% since the start of the year, she added.

This comes as the total value captured in DeFi has increased by 50% since the start of the year, from $60 billion to over $97 billion, based on The Block’s data dashboard.

Discover the Bitcoin ETF Inflows Pushing Bitcoin to New Highs

Despite continued significant outflows from Grayscale’s converted GBTC fund, US spot Bitcoin BTC

+4.81%
ETFs continue to pile up net inflow in total – now accounting for a total net inflow of $7.4 billion. On Thursday, BlackRock’s IBIT became the first new spot Bitcoin ETF to reach $10 billion in assets under management after securing its second-largest daily inflows since its launch on January 11.

“We are not surprised that the market price for bitcoin remains resilient and we expect the dips to be shallow and to be bought aggressively,” Chhugani and Sapra said. “We continue to expect Bitcoin to reach all-time highs this year and surpass the peak of $69,000 in 2021.”

“Moreover, if the regulations are clear, we would not be surprised in the future if global asset managers were to move towards a possible DeFI ETF and specific active DeFi funds,” she added.

Bitcoin’s price broke above $65,000 earlier today and reached new all-time highs in Europe above €60,000. Bitcoin is currently trading at $65,174, up more than 5% in the past 24 hours and 27% in the past week, and is up more than 50% this year, according to The Block’s price page.