Market Wrap: Bitcoin Stalls Below $40K, Analysts Point to Risks in DeFi

Bitcoin (BTC) held above $37,000 on Friday and was up about 3% over the past 24 hours. Meanwhile, some alternative cryptocurrencies began to stabilize after a volatile week.

Analysts were also looking for signs of a possible bounce in equity markets, which could encourage crypto buying. So far, some traders appear to be on the sidelines in both traditional and crypto markets. The S&P 500 is roughly flat over the past week, compared with a 1% gain in BTC and a 3% drop in ETH over the same period.

"Investors continue to withdraw from U.S. stocks amid the expected tightening of the US Federal Reserve's monetary policy," Alex Kuptsikevich, an analyst at FxPro, wrote in an email to CoinDesk.

If selling continues, more investors could start to reduce their positions on risky assets, and cryptocurrencies may be hit first, according to Kuptsikevich. That means a short-term price bounce could be limited.

Further, given macroeconomic headwinds, some analysts are concerned about a coming "crypto winter," similar to what occurred in 2017-2018. But it appears that winter is already here, especially given the nearly 40% drop in BTC from its all-time high of close to $69,000 in November.

The recent underperformance in some altcoins and decentralized finance (DeFi) tokens indicates heightened risk in crypto markets. And when uncertainty is high, some traders tend to rotate into bitcoin, which is deemed to be less risky in the crypto market.

The CoinDesk markets team has covered the sharp sell-offs across various tokens over the past two weeks, which could keep some crypto buyers on the sidelines. Here is a rundown of risks we identified.

Tokens related to Wonderland developer plunged:

In the past 24 hours, Popsicle Finance’s ICE fell as much as 22%, Wonderland’s TIME fell 15%, and Abracadabra’s SPELL dropped 15%. These are tokens created by Daniele Sestagalli, who gained a cult following in recent months thanks to his community-centric approach toward crypto projects. His protocols were worth billions of dollars at their peak, but those fortunes have since faded away, CoinDesk's Shaurya Malwa reported.

A falling out between two startup projects on Cardano:

On Wednesday, CoinDesk's Lyllah Ledesma wrote about the SundaeSwap debacle that left CardStarter users with steep losses. The conflict is between CardStarter, which describes itself as a "decentralized accelerator" for startup projects focused on Cardano, and SundaeSwap, a decentralized exchange built on the Cardano platform.

And then, there's potential contagion risk in Terra's UST stablecoin:

LUNA, Terra’s native token, was down as much as 10% during the past 24 hours due to yet another scandal. LUNA is on Abracadabra, a DeFi lending platform run by Sestagalli. LUNA was partly created for issuing stablecoins. The reserves of Terra-based lending and borrowing protocol Anchor, which offers a supposedly industry-beating benchmark deposit rate of around 20%, are also sliding fast as a result of the crypto market crash. Read more here.

Terra’s UST stablecoin was thrown into flux because the tokens used to leverage some stablecoins related to Sestagalli are in a mess. Some observers following the asset peg saga are worried UST and MIM could serve as a “contagion” that destabilizes other pools on Curve, CoinDesk's Andrew Thurman reported.

Digital assets in the CoinDesk 20 ended the day higher.

There were no losers in the CoinDesk 20 on Friday.

Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive, and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.