Liam Frost · 17 hours ago · 2 min read
If you’ve followed the crypto market over the past months, you’ve likely noticed what many others have: a majority of the best-performing altcoins are based on decentralized finance (DeFi).
The image below from crypto analyst Taha Zafar depicts this trend well. While two weeks old, the table shows that as of the time of his analysis, DeFi coins were going parabolic.
An Ethereum DeFi bubble?
With the strong outperformance of these assets, many have started to “cry” bubble or at least have begun to argue that valuations are getting frothy.
“DeFi is one of the most exciting things going on in crypto right now, but the idea that sector will decouple from the rest of the market is ludicrous. Eventually, the mania will end, and DeFi will trade in line with the rest of the market.”
A venture capitalist, Julien Thevenard, also shared this data below on Jun. 21, lending to the idea that Ethereum’s DeFi sector might be a bubble currently in formation.
The coins of DeFi protocols are trading at absurd price-to-earnings (PE) ratios of 100 to 4,360.
While coins are not exactly like shares of traditional companies, value investors often avoid stocks with extremely high PE ratios. For further context, Investopedia reports that the average historical PE ratio of the S&P 500 has been 13~15.
Compound valuation is clearly high compared to its earnings. This is a bet on:
– future vote to share earnings with COMP holders.
– assets locked to explode.
Looking at Uniswap and Curve next. pic.twitter.com/iJBft3Ekuv
— Julien Thevenard (@JulienThevenard) June 21, 2020
Maybe that isn’t the case, says top investor
According to prominent crypto venture investor and analyst Andrew Kang, however, the sentiment that DeFi is a bubble may be incorrect.
On Jul. 1, Kang released a 25-part thread on DeFi in which he shared his thoughts on “where we are in the state of the DeFi market from an ‘inside perspective.” The takeaway, as can be seen in the chart below, is that DeFi is still in the earliest phases of growth.
With recent DeFi token price run-ups, people have been crying "bubble!".
So is it too late to invest or not?
Here are my thoughts on where we are in the state of the DeFi market from an "inside perspective" pic.twitter.com/cDAhpc9tVN
— Andrew Kang (@Rewkang) July 1, 2020
He attributed this optimistic sentiment to a number of trends.
Firstly, Kang explained that Defi usage has “traditionally been concentrated with hardcore users and/or ETH whales,” evidenced by the mere 1,000~2,000 addresses that actively used Ethereum finance applications just weeks ago.
What’s important about this statistic is that 1,000-2,000 users make up less than one percent of all active crypto users. That’s to say, DeFi has exponential growth potential. Heck, even one of Bitcoin’s biggest bulls, Chamath Palihapitiya, doesn’t know what DeFi is.
Secondly, Kang noted that Asian money — which is what drove many altcoin crazes during the 2017/2018 bubble — is starting to “feel the FOMO.”
And thirdly, DeFi development is “hitting an inflection point” with more on-chain liquidity, better development tools, successful case studies, education, and much more.
The confluence of these trends, according to the investor, indicates that DeFi has room to grow in the long run.
According to CryptoSlate data, DeFi tokens currently represent a $3.05 billion market or 1.17 percent of the entire cryptocurrency market cap.