Bitcoin correction heralded as a ‘BTD’ opportunity, but what about DeFi?

DeFi protocols were buzzcut as their token values plummeted and the total value locked on all platforms fell to levels not seen since April.

Cryptocurrency investors are still picking up the pieces from the May 19 market-wide implosion which saw Bitcoin (BTC) drop to an unexpected low at $30,000. Post-mortem analysis now shows that the correction catalyzed a mad dash among traders running for the exits as the cascading sell-off resulted in a record 10,525 BTC liquidated across all exchanges. 

Altcoins were quick to follow suit as they joined Bitcoin in its plunge and hardly a token was left unscathed by the downturn as a wider-sell-off rippled across the market, resulting in a $437 billion haircut to the total market capitalization to $1.672 trillion, its lowest level since April 25.

Total cryptocurrency market capitalization. Source: CoinMarketCap

Decentralized finance (DeFi) took an especially hard hit as many of the lending protocols offer flash loans and other forms of leverage to users.

With Bitcoin and Ether (ETH) accounting for a large portion of the funds locked on such protocols, their rapid price decreases resulted in a similar decline in TVL across the DeFi sector which fell by 21.5% to $114.15 billion according to data from Defi Llama.

Total value locked in DeFi. Source: Defi Llama

The AAVE lending platform, which is currently the highest-ranked DeFi platform in terms of TVL according to DeFi Llama, saw its TVL decrease by 16% alongside a 26% decline in the price of AAVE token to $460. In the same time, MakerDAO (MKR), the second-ranked platform, saw its TVL fall by 26% with the MKR token shedding 16.5% in value.

AAVE/USDT vs. CAKE/USDT vs. COMP/USDT vs. MKR/USDT vs. UNI/USDT. Source: TradingView

And it wasn’t just the DeFi lending platforms that took a hit. Uniswap, the top-ranked decentralized exchange (DEX) saw its TVL decline by 17.4%, while its token value fell 26% to $25.60, its lowest level since the beginning of March.

SushiSwap (SUSHI) and PancakeSwap (CAKE), Uniswap's direct competitors, experienced similar declines in TVL as well as token prices, with the price of CAKE falling by 25% and SUSHI collapsing by 30%.

Of course, no market downturn would be complete without some nefarious actors getting involved as was the unfortunate case for the Binance Smart Chain-based Venus (VXS) lending platform. The protocol suffered a series of price manipulations that resulted in more than $200 million worth of DeFi liquidations and over $100 million worth of bad debt on the protocol.

As a result of the attack and the overall market downturn, XVS price dropped 50% to mark a swing low at $55 and the total value locked on the protocol decreased by 46%.

In the course of a few days, the market went from chatter about the possibility of the 'summer of DeFi 2.0' to blood on the streets and concerns of an impending multi-year bear market. This is just the latest example of why investors shouldn’t get too comfortable in the crypto market because circumstances can change at the drop of a hat.

Despite the current downturn, DeFi's transformational journey to reshape financial markets is just beginning and this correction could present a rare bull-market buying opportunity for those who are brave enough to recall Warren Buffet’s famous line which urges investors to:

“Be greedy when others are fearful, and fearful when others are greedy.”

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