Last week, bitcoin experienced the largest weekly decline since March, initiated by sudden strength in the US dollar index. However, $BTC has managed to successfully defend the psychologically important level of $10,000.
Despite the sudden risk-off sentiment, bitcoin had been flashing warning signs for a few weeks prior. One warning signal was elevated amounts of futures open interest on BitMex derivatives exchange, which has coincided with price drops recently. Since then, futures open interest has plummeted to levels not seen since June 1, potentially signaling upward momentum resurfacing.
Blockchain data and research firm, CryptoQuant, stated earlier today that “the number of $BTC transferred hit the year-high, and those transactions are not from exchanges. Fund Flow Ratio of all exchanges hit the year-low. Something’s happening. Possibly OTC deals.”
CryptoQuant also notes that “this also happened in February 2019 when OTC volume was skyrocketing.” If history repeats itself, the increased bitcoin transfers could indicate new, large buyers entering the market.
Additionally, the linkage between the dollar-backed (unverified) stable coin Tether ($USDT) and bitcoin is well known, and cannot be underestimated. Since 2017, the positive correlation has increased linearly.
This week, per the Block, Tether announced that they were launching an additional version of the stable coin, $USDT, on the Solana ($SOL) blockchain because “Solana can help users exchange $USDT at speeds greater than 50,000 transactions per second (TPS), often for less than $0.00001 per transaction.”
Given Tether is the lifeblood of DeFi and Ethereum network transaction costs have skyrocketed recently, a Solana-based $USDT might enable greater DeFi adoption given a key bottleneck has been removed. If the aforementioned does occur, bitcoin will certainly benefit.
Last, the DeFi boom may have resumed after a short ‘cooling off’ period last week, with several high profile tokens like $YFI reclaiming critical price levels. The DeFi craze continues to drive greater collateralization of bitcoin on the Ethereum network via ERC-20 compatible tokens in order to gain access to the myriad of DeFi services on Ethereum, primarily driven by “yield farming.”
Decentralized mechanisms like RenBridge allow holders of $BTC to easily convert it to an ERC-20 compatible version without going through a myriad of steps, i.e. cross-chain interoperability within a few clicks.
Per DeFi Pulse, the top two ERC-20 compatible bitcoin tokens on DeFi are wrapped bitcoin ($WBTC) and Ren bitcoin ($renBTC). Both tokens combined, top $700 million in total value “locked in” DeFi and exhibit a strong linear growth trend.
As always, no one has a crystal ball, but the aforementioned analysis might provide an explanation as to why bitcoin has maintained its foothold above $10,000, to-date.
However, given the macro uncertainty, short-term gyrations seem likely, which could include additional weakness or range trading.
Disclosure: The author owns bitcoin, ethereum, and solana.
Note: Not investment advice. Meant for educational purposes only.