(Bloomberg) -- The biggest casualty of the current Bitcoin renaissance? Cryptocurrencies linked to decentralized finance applications, the favorite darling of the digital-money crowd this summer.
While Bitcoin has climbed about 50% since early September, DeFi coins -- used largely for speculation within apps that let investors lend to, trade with and borrow from one another -- have tumbled after posting triple-digit returns just months earlier.
The DeFi Pulse Index that tracks performance of 12 DeFi coins is down about 26% since it was created on Sept. 9. Exchange FTX's DeFi Index Perpetual Futures, which provides exposure to 25 different coins, is down about 42% since the beginning of September.
“Token values for various DeFi projects are definitely declining quickly, as they probably should,” said Vishal Shah, founder and chief executive of Alpha5, a crypto derivatives exchange who used to head principal investments and discretionary trading at Elwood Asset Management. “Most of the tokenomics for DeFi protocols have been built on farming, or pure degenerate gambling tendencies. Their longevity was questioned from birth.”
Over the summer, many investors embarked on so-called yield-farming strategies promising triple-digit returns. They'd lend and borrow within a DeFi app to earn fees and additional tokens as incentives, such as Comp, on a bet that everything would appreciate. In June, Comp's token price nearly doubled before crashing.
Many DeFi projects are now seen as having been poorly crafted from the beginning, resulting in a loss of investor funds via a slew of snafus. Hackers have also poured in. Regulatory concerns are expected to raise issues, as decentralized exchanges, for one, aren't checking their users' identities, possibly enabling money laundering.
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The flood of speculators overwhelmed the DeFi movement, which many crypto diehards see as ultimately changing the face of finance, with these apps being promoted as providing lower fees and increase access to financial services by disintermediating providers like banks. Funds locked in various DeFi apps still stand at a record $12.7 billion, according to tracker DeFi Pulse.
“I think DeFi will have its place, in due time, in a more tempered version,” Shah said.
©2020 Bloomberg L.P.
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