The significant decline in Bitcoin addresses holding small quantity of Bitcoin aligns with the exponential growth of the DeFi market.
From the beginning of August, the total value locked in DeFi covenants on Ethereum blockchain increased from $4.091 billion to $9.77 billion. The huge increase in DeFi investments has spurred demand for tokens such as Wrapped Bitcoin (wBTC).
Investors fundamentally use DeFi covenants to generate returns using their crypto holdings. As there is no way to transfer Bitcoin to Ethereum blockchain, users exchange BTC to wBTC and the utilize wBTC on Defi platforms.
Utilizing wBTC to attain exposure to DeFi platforms and returns permit Bitcoin holders to accomplish two things. Initially, BTC users can continue using DeFi convenants without liquidating their Bitcoin holdings.
Secondly, Bitcoin investors will not miss the likely price gains. The quantum of small Bitcoin addresses holding 1 Bitcoin probably declined as the need for wBTC has risen. Investors might have exchanged their BTC for wBTC as DeFi opportunities continue to create waves in the market.
Back in July, Jack Purdy, an academic at Messari opined that the predominance of wBTC would carry on over the short to medium term.
For these reasons wBTC is poised to continue its dominance in the short to medium term
That being said, there’s still the looming threat of government intervention once these assets grow large enough to catch regulator’s attention
— Jack Purdy (@jpurd17) July 23, 2020
But the drop in small addresses and the surge of wBTC does not signal a bearish trend for Bitcoin.
Ultimately, when users choose to withdraw their wBTC from the DeFi covenant, they would exchange it for the Bitcoin. Therefore, if BTC is converted to wBTC on Ethereum blockchain, it does not mean that investors have diluted their Bitcoin holdings.
Rather, it indicates that such a trend may not last beyond the end of prevailing DeFi cycle. Two days ago, Skew stated that the value of wBTC is fast approaching $1 billion. As per data provided by CoinMarketCap, 76,047 wBTC are presently in circulation, indicating that increasing number of investors are moving BTC to Ethereum-powered DeFi platforms considering the returns.
Wrapped #bitcoin, accelerating and marching towards $1bln pic.twitter.com/5SMsg4qlji
— skew (@skewdotcom) September 18, 2020
As wBTC reflects the precise value of 1 BTC, it cannot be construed as bearish trend for Bitcoin in the long-term. As a matter of fact, it can be argued that the trend is positive for Bitcoin as investors will restrain themselves from diluting their holdings as they would miss a new opportunity to earn from the likely rally of Bitcoin.
While DeFi platforms facilitating crypto investors to benefit using wBTC are generating profits, there prevail high-risk ventures that offer relatively huge returns. The increasing market cap of wBTC indicates that a majority of investors are not willing to lose the opportunity of earning from an impending Bitcoin rally.