Matt Williams
The total DeFi market capitalization has retraced from the 2021 highs of $200 billion to a low of $60 billion in Q2 2022. Most of that downtrend took place in April and May, after the February and March monthly candles closed green.
A retrace like this was to be expected as the DeFi market cap opened 2020 at just under $2 billion – then increased 100x within the space of around 20 months. The DeFi markets opened 2021 around $20 billion, and 2022 at $160 billion, so 2022 has seen an over 50% retracement.
The DeFi all time high market cap was hit on November 8th 2021 the day Ethereum hit $4,875 and Bitcoin hit $69,180, although BTC is not considered a DeFi coin, part of the reason the DeFi market cap is smaller. The total crypto market cap now is $1.4 trillion and hit $3 trillion at its peak.
In May 2021 the DeFi market cap also had a historical correction, from $155 billion to $52 billion, a 66% retrace. The ‘sell in May and go away’ trading strategy seems to have been a good play both years.
Crypto platform eToro has a DeFi Portfolio to help users that invest in DeFi manage their risk, including DeFi coins like Aave, Chainlink, Compound (COMP) and Maker (MKR) which are listed on its exchange.
Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection.
What is DeFi Market Cap?
The DeFi market cap chart on Tradingview.com is charted separate from the crypto market cap to measure only the size of DeFi projects and the DeFi coins that power them as governance tokens.
The market cap of each DeFi protocol is calculated by multiplying its DeFi token price by the circulating supply of coins, or for fully diluted cap by the max supply including coins not yet unlocked.
For example one of the top DeFi coins by market cap is Uniswap (UNI), with a token price of $6.10 and 69% of its total supply of 1,000,000,000 UNI are currently in circulation. Its live market cap is $4.2 billion ($6.1 billion fully diluted).
ETH is also not included on the DeFi market cap chart above, although many DeFi coins do run on the Ethereum blockchain. ETH is considered Layer-1, and the DeFi market cap measures all the Layer-2 coins as a measure of the general size and health of decentralized finance, separate to cryptocurrency.
As of mid May 2022 ETH and BTC have a market cap of $288 billion and $602 billion alone.
Other metrics to measure the DeFi ecosystem include total value locked (TVL) which also takes into account assets being staked for yield farming, or locked up in other ways such as in smart contracts or liquidity pools.
According to DappRadar’s DeFi overview the DeFi TVL is today approximately $100 billion although estimates can vary between DeFi market tracking sites like DappRadar, DeFi Llama and DeFi Pulse.
DeFi Market Cap Prediction
The DeFi market cap can sell off when Bitcoin crashes, and when the stock market dips. Both BTC and the SPX have been bearish so far in 2022. Despite decentralized finance being a separate investment class, investor interest and appetite for risk can correlate to other financial markets.
Crypto and DeFi are volatile however institutions are increasingly showing signs of interest in it. Several Goldman Sachs DeFi reports show the investment bank considers DeFi and decentralized applications (dApps) to have potential for mass adoption, and that DeFi use cases will ‘disrupt the financial system’.
Traditional finance (TradFi) globally has a valuation in the hundreds of trillions, so the DeFi industry is still in a nascent stage by comparison with room for long term growth – regardless of short term price swings, bull cycles and bear cycles.
Just as the DeFi market cap recovered from its May 2021 drop to set new highs, many traders expect a bounce soon either from the current $60 billion level or after a retest of the 2021 swing low, around the $50 – $55 billion 2021 support level.
The first resistance level would be a retest of the 0.786 Fibonacci level around $80 – $85 billion. That could be hit as soon as the next few weeks and if the May monthly candle reclaims and closes above that, leaving only a wick to the downside below the 0.786 Fib, that would show strength.
Then a retest of the 0.618 Fib at $108 billion and the psychological resistance area of $100 billion would be in play. From a technical analysis (TA) standpoint the $100 billion area could be a target to take profit if you do buy the dip on a popular DeFi coin like LUNA, ATOM or AVAX.
Is DeFi a Good Investment
The DeFi market cap chart is still overall in a bullish uptrend since 2020, and hasn’t broken its market structure until several monthly candles start closing under the 2021 low of $52 billion.
Even if that does take place, it could be a reaccumulation cycle before resuming its bull run.
Luna Crash to Under $1
Part of the DeFi crash is due to the black swan event surrounding Terra (LUNA) and stablecoin TerraUSD (UST) – unrelated to any fundamental analysis (FA) overview of decentralized finance.
Once that panic and selling pressure stops (Luna crashed to as low as $0.83, from about $90 earlier in May), prices should go up in 2022 or 2023 in the run-up to the 2024 Bitcoin halving.
Some low market cap DeFi coins have not been affected by the recent sell off, for example DEFC with a similar utility to Uniswap has been in an uptrend since early May 2022.
DeFi News
Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection.
This article was written for Business 2 Community by Matt Williams.
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