Timing the market is almost impossible, but these five metrics can help traders spot when a sector rotation is in progress.
An important aspect of maintaining investment income is knowing when an asset or sector is showing signs of depletion and when a sector rotation is in progress.
This is especially important in the fast-moving cryptocurrency markets that can change direction in the blink of an eye and turn crypto millionaires into depressed bag holders.
Most investors know that the non-fungible token (NFT) sector has been on fire since July, when CryptoPunks, Mutant Ape Yacht Club and pet EtherRock NFTs hit six and seven figure sums during the top NFT marketplace OpenSea exceeded $ 4 billion in total sales. While the frenzy has been exciting, many new projects have been launched on a variety of blockchain networks, and the recent drop in transaction volume could be a signal that investors are trying to switch pastures.
In the first quarter of 2021, decentralized financial protocols (DeFi) and their associated tokens were the focus of investors, but that sector cooled off in March when the NFT market went through its first bull market. Now the tide seems to be changing and profits from NFT trading could return to the Altcoins and DeFi markets.
Here are five signs that a capital rotation from NFTs into the DeFi sector may be underway.
Large and small cap DeFi token rally
DeFi Perp is an index token on the FTX cryptocurrency exchange that includes a basket of 25 of the major DeFi-related cryptocurrencies including Maker (MKR), Polkadots DOT, Solana (SOL), Curve DAO Token (CRV), Uniswap (UNI ) and SushiSwap (SUSHI).
Data from TradingView shows that DeFi Perp’s price has risen from its low of $ 5,331 on July 20th and has since risen 138% to a daily high of $ 12,771 on September 2nd.
DeFi Perp’s soaring price back to the support and resistance level of $ 12,500 that proved to be important during the rally between February and May 2021 is a sign that funds are flowing back into the DeFi ecosystem, just like the daily trading volumes and price floors for NFTs are declining.
NFT prices are cooling down
Since the rapidly rising NFT prices have been the main feature of public attention, this is also a red flag and a good metric for assessing the general health of the sector. As shown in the graph below, which shows the daily average floor price of NFTs sold in the market, the average floor price hit a high of 1.02 Ether (ETH) on August 29 and has since declined to 0.5 ETH.
The fact that NFTs are selling cheaper or new high volume projects are being sold at lower prices could be a sign that the market is saturated and the momentum is slowing.
Active users and transactions on DeFi platforms are increasing
Another sign that the DeFi ecosystem continues to grow is the steadily increasing number of DeFi users over time, as shown in Data from Dune Analytics below.
New users who interact with logs are likely to be drawn in by the steady returns and hassle-free token staking, and Cointelegraph has reported that traditional finance investors are also keen to see what DeFi has to offer.
While this metric tracks the number of unique wallet addresses that interact with DeFi protocols, and it is possible for some users to have multiple addresses, the situation has gotten more complicated recently. The longer-term way of generating a return on DeFi by staking, providing liquidity, or locking tokens for logs has arguably resulted in a decline in users switching between multiple wallets and paying high gas fees to constantly move assets.
The continued entry of new users into the DeFi space could signal that some who made profits with NFTs are now looking to lock in profits and generate a return, while newcomers to the market are drawn to its lower-risk opportunities.
$ 4,000 ETH signals a rotation in the game
Another development that could signal a sector rotation towards DeFi is the rising price of Ether.
Data from Cointelegraph Markets Pro and TradingView show that the price of Ether has increased 125% since hitting a low of $ 1,706 on July 20, with the most recent 23% increase in price from $ 3,134 on August 30 to a High at $ 4,029 drifted Sept. 3.
Since most of the top DeFi protocols are on Ethereum, the top altcoin is one of the most important assets in the DeFi ecosystem and is widely used to set and buy other tokens.
Related: Does the Ethereum rally signal the next bull market phase for Bitcoin above $ 50,000?
DeFi TVL hits a new all-time high
One final metric that indicates that a sector rotation is in progress in DeFi is the Total Value Locked (TVL) on all DeFi protocols. On September 2, the number hit a new record high of $ 171.5 billion.
Previous increases in TVL were largely due to rising Bitcoin and Ether prices, but the current boost comes as both tokens trade well below their 2021 highs, suggesting that the increase in TVL may be more with the increasing value of DeFi -Token has to do and the increased use of stablecoins.
While the NFT boom is not over yet, multiple data points suggest that the bullish momentum has reached a depletion point, and the recent spike in altcoin and DeFi prices is a signal that a rotation is at an early stage is located.
Would you like more information about trading and investing in crypto markets?
- NFT whale ‘Pranksy’ petted by fake Banksy for 97.7 ETH
- Internet Computer publishes 10,000 free NFTs in the first drop
- Decentralized exchanges and aggregators are driving DeFi’s growth
- Rise in activity and token prices show that ‘DeFi Summer 2.0’ has already started
- Ethereum price breaks USD 3,500 and hits 3-month high against Bitcoin
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph.com. Every step of investing and trading involves risk, so you should do your own research when making a decision.