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Major correction for DeFi as Bitcoin rejected again above $40K: What’s next?

major-correction-for-defi-as-bitcoin-rejected-again-above-$40k:-what’s-next?

The DeFi market has corrected hard as Bitcoin dropped below $40,000, but analysts say a recovery is likely.

The decentralized finance or DeFi market saw a steep correction over the last 12 hours as Bitcoin (BTC) was unable to break the $41,000 level.

Meanwhile, analysts say that the profits from major DeFi tokens are flowing back into Bitcoin, even though the DeFi market is still lagging behind despite BTC’s recovery over the past week.

1-hour candle DeFi index (Binance). Source: TradingView.com

So what’s next for the DeFi market?

Both major bluechip DeFi tokens and small market cap cryptocurrencies are struggling to recover against Bitcoin over the weekend.

Typical DeFi bluechip assets include the likes of Aave (AAVE), SushiSwap (SUSHI), Uniswap (UNI), Maker (MKR), Compound (COMP), and Synthetix (SNX).

Major DeFi tokens with slightly smaller market caps include Alpha Finance (ALPHA), Yearn.finance (YFI), and 0x (ZRX).

The primary reason behind the DeFi market’s correction is that the profits from DeFi tokens were flowing into Bitcoin as BTC began to pull back.

This trend amplified the selling pressure on DeFi tokens, particularly as the Bitcoin/Ether (ETH) pair has seen short-term weakness in the past two days.

However, the cryptocurrency market has been moving quickly and thus market dynamics could change rapidly over the next coming days, especially with the launch of CME Ether futures on Monday.

At the same time, another DeFi rally could be sparked by the price of Bitcoin cleanly breaking above $40,000 this time and consolidating between $41,000 to $42,000, the all-time hig. 

For this to materialize, Ether would have to catch up to Bitcoin and regain momentum above $1,700 in the short term. For now, ETH is trailing behind Bitcoin with the ETH/BTC pair struggling to recover.

Whether ETH reclaims $1,700 as a support area would likely be the key factor that decides the trajectory of the DeFi market in the foreseeable future.

ETH/BTC 1-hour candle price chart (Binance). Source: TradingView.com

Can Bitcoin rally to a new all-time high?

Puru Saxena, an investor and a retired money manager, said that if Bitcoin goes back above $40,000 again, it would invalidate the bearish scenario. He said:

“Bitcoin back above $40,000 and although it still hasn’t taken out its ATH, unlike the previous cycle, it hasn’t completely broken down either. If $BTC closes above its January high, that’ll mean my assessment of the price action was WRONG and the bulls were right.”

Exchange heatmaps, especially the orderbook of Binance, show large sell walls at $41,000 and $42,000. As such, if Bitcoin reclaims $40,000 and makes its way towards $41,000, it would confirm that a bullish market structure is still intact.

If Bitcoin regains strength and considering that the DeFi index has not broken its parabolic structure, a continuation of the rally is more probable than a steep correction.

Bluechip DeFi assets have already begun to recover back to the daily open on Feb. 7, with AAVE, SNX, and ALPHA showing strength.

It would be crucial for the DeFi index to recover beyond 2,080 in the short term, however, to maintain its bullish market structure, which would require a 4% rally.

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