This article is geared toward helping investors gain a better understanding of the ups and downs of cryptocurrencies in the market over the past year.
The fall of the market that took place in March will be forever preserved in history as one of the fastest and most astonishing sell-offs that has ever swept the markets of cryptocurrency. Within the first hour, the price of bitcoin dropped by thousands of dollars — the liquidity of the order book almost disappeared. From multiple charts, it’s apparent that shortly after the beginning of the market crash (which happened at roughly 10:30 am), the number of orders surrounding the mid-price shares plummeted, causing a liquidity crisis.
The March crisis proved that an asset price does not only reflect a real value at a point in time as assigned through the discovery of a market-based price, it’s also a product of relentless feedback loops caused by automatic liquidations and decimated order book depth. As crypto markets rise and order book liquidity strengthens, the frequency and magnitude of price drops can be expected to decrease.
The on-chain transfers of more than $100,000 are categorized as large. The overall volume of such transactions is an indicator of the transaction activity of institutional investors and high net-worth individuals.
In 2020, large transactional volumes of Bitcoin have been increasing due to institutional interest. If we compared the average large transactional volume on the Bitcoin blockchain from December 2019 to December 2020, it becomes clear that the volume has more than quadrupled from an average price of $7 billion per day to more than $30 billion.
Ultimately, by 2020, companies embraced Bitcoin — but sometimes, in an unexpected way. For example, sophisticated hedge fund investors began focusing on capturing spreads, taking into consideration the inefficiencies of this fresh market in its infancy.
The decentralized finance sector experienced moderate adoption at the beginning of 2020, when lending protocols dominated the space. At that time, the total value of DeFi was comparatively stable, ranging between $700 million and $1 billion. When Compound launched its governance token on June 16, the interest in the decentralized finance sector virtually exploded due to the fact that yield farming attracted many new clients.
In late 2020, the overall value locked in the decentralized finance sector increased from $670 million to $14.5B — that’s a growth of 2,100%. By December, over one million unique addresses were affiliated with DeFi, 10x the growth from January. As decentralized exchanges (DEXs) and lending platforms experienced intense growth in 2020, on the other hand, derivatives platforms experienced only moderate growth.
My prediction for 2021 is as follows: derivative platforms in the decentralized finance sector will experience considerable growth.
Who knows what is actually going on?
Let’s give up on recapping the weekly or annual macro markets performance (as there are those who will provide a more profound and in-depth explanation and analysis), and try to summarize 2020 in simple words: before making an important decision, think twice.