Why DeFi Tokens Had Been Under Huge Pressure since August 2020?

Although the broad cryptocurrency market had performed above expectations this year, a lot of attention had been given to DeFi tokens. Considering this area of the industry continues to grow exponentially, an increasing volume of capital had been pouring into it, also facilitating a growing market valuation.

Tokens like Chainlink (LINK),  yearn.finance (YFI), or DAI (DAI), are still very popular, although, for the past two months, their values dropped substantially. Last week we’ve covered the issue of using Elliot Wave for crypto trading, but today we want to highlight some of the reasons why DeFi tokens are such big underperformers.

# Bubble market conditions

The rapid rise in valuations had not been justified by the underlying fundamentals, and because of that, DeFi tokens were in a mini-bubble during the summer. It was difficult to sustain those valuations, with massive implications in case the risk sentiment will start to deteriorate. A corrective move had started across the entire market and as a result, DeFi tokens started what turned out to be a bear market.

# Deteriorating risk sentiment

All financial markets were running sugar high as risk sentiment had been propped up by abundant liquidity, US dollar weakness, and the realization that COVID-19 is not the most deadly disease. However, as we got close to the autumn, the cryptocurrency market had not been benefited by the sudden realization things can be bad, regardless of the massive stimulation.

The positive correlation with other asset classes like stocks and commodities was an important drag and cryptocurrencies dropped more than any other category. Outperformance on the upside generally leads to sharper corrective moves, the exact thing we’re not seeing materializing. What’s even worse is that DeFi tokens continue to look back from a technical perspective.

# Overcrowded trade

Even though DeFi comes with some innovative ways to leverage the benefits of the blockchain technology, there had been exaggerated speculations on these tokens, leading to an overcrowded trade. When several tokens post massive gains, outpacing any other big name like Bitcoin or Ether, valuations reach a point where they can’t continue to go higher.

Overcrowded trades end up in tears and the persistent DeFi tokens weakness should be a lesson for those caught on the wrong foot for the past month and a half. The irrational price behavior will continue to dominate in the next few years, which makes it very tricky to time correctly the point where the market will tumble impulsively.