cat bounce

It’s a Most Welcome Rally, but is It Just a Dead-Cat Bounce?

After 14 days of mayhem in the crypto markets, DeFi investors have stopped hyperventilating. 

 Yes, it’s true that Ether lost more than half its value in the last two weeks, hitting $1,853 on May 23. That’s a pretty heavy drop even in the wild and woolly world of crypto. Then it jumped 40% to $2,591 by the time of writing. Bitcoin and DeFi Blue Chips have done likewise, with Cardano surging 57% since hitting a 30-day low on May 23. 

But what if this is just a dead-cat bounce?

More than half of crypto investors believe this week’s rally may just be a temporary respite from a longer term swoon, according to a May 24 poll conducted by Darren Lau, formerly of crypto fund The Spartan Group, who got responses from 2,781 voters. 

Image source: Twitter

“Looks like a lot of the leverage has been washed out, or so we hope,” Ryan Cantering Clark, a crypto trader with more than 55,000 Twitter followers, told The Defiant. “If anything I would expect most market participants to sort of be waiting on each other to make a move,” he said, expressing the middling sentiment that Lau’s poll revealed.

The sell-off reminds many crypto veterans of January 2018. That’s  when Bitcoin hit its then all-time high, before dropping 40% and ushering in a three-year bear market known as Crypto Winter. A lot of tokens cratered, never to return, and only the most resolute investors stuck with their convictions through the long night.

Outstanding Loans Down

It isn’t just token prices that are prompting worries that this is just a dead-cat bounce. Outstanding loans on three top DeFi lending protocols, Aave, Compound, and Maker, are down 23% off their all-time high of $17.5 billion to $13.4 billion as DeFi investors wind down their positions or are liquidated. The lower the value of outstanding loans, the more difficult for the market to overheat based on leverage-funded buys.

Image source: Dune Analytics

More Bearish Signals

The open interest of futures and options,  on both ETH and BTC is also down in the face of May’s crypto selloff. This interest, which is the total amount of outstanding derivative contracts, indicates investors are shying away from more exotic bets in the market. 

Image source: Glassnode

There are more bearish signals. The percentage of Ether in profit dropped to 81% on May 23, a number not seen since October 2020, according to data compiled by Glassnode. This means that if all investors were to sell their Ether today 81% would profit from having held the asset. Glassnode suggests that “using a simple threshold at 95% helps to identify market tops.” Ethereum was consistently seeing in profit ETH at above 95% since mid December before the recent drop.

Image source: Glassnode

Still, for all the speculation on whether we’re witnessing a dead cat bounce or a bona fide floor, Cantering Clark for one doesn’t foresee an outright bear market in DeFi tokens. The overall thesis is sound, say the bulls, and the market has strengthened its resilience in the last 12 months.

Su Zhu, the CEO at Three Arrows Capital in Singapore, said the mass entry of financial institutions into the space is a game-changer. At some point, new signals are bound to come along that change the psychology of the marketplace, and when that happens, institutions will inject a river of buying liquidity pretty darn fast.

“ETH/USD market structure is intact and the space is way further than in 2018,” commented a trader known as Danger on Twitter

In any event, the sell-off has finally ended silly talk about a crypto bull supercycle in which 

“assets only go up.” 

Su Zhu provided it, saying that “the odds of a multi-year bear market again become significantly lower as institutional and mainstream capital comes into the space.” 

Danger summed up the general sentiment saying that “we’re entering a period of consolidation after a huge nuke. Whether it breaks up or down is anyone’s guess, though I’m long bias.”