What if I told you that there was one factor you could use to predict whether a major altcoin like ETH, SOL, or SUI will pump? A factor that could even predict pumps for other altcoins in their ecosystems. In the last crypto bull market, this factor took ETH and many Ethereum-based altcoins to massive all-time highs. In this bull market, it could do the same for SOL, SUI, and even BTC, and it's about to come back into play.
That's why today we're going to tell you about this factor, tell you which altcoins it could boost, explain how it could drive Bitcoin much higher than anyone expected, and why it could trigger the next crash. This is Crypto Alpha you cannot afford to miss.
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DeFi Leverage Causes Altcoin Rallies
Now, before I reveal the factor in question, I'll start by saying that it may not seem very significant at first glance.
This factor is one of those things that nobody pays attention to until it's too late. It's a factor that's played a role in the rise and fall of every crypto bull market and one that you need to start watching right now. So, this factor is DeFi leverage, specifically DeFi borrowing using Bitcoin as collateral.
For those unfamiliar, during bull markets, crypto whales will often borrow stablecoins against their crypto holdings in order to buy altcoins. Historically, they did this primarily with the smart contract crypto belonging to that DeFi chain. For example, Ethereum whales would use their ETH as collateral in DeFi protocols to borrow stablecoins, usually USDC.
Then they would use this USDC to buy altcoins, usually in Ethereum's ecosystem. As ETH's price would grow, so would the amount of borrowing and the investment into Ethereum altcoins. Now, here's where things get interesting.
In theory, Bitcoin, or rather, the BTC coin, is the ideal form of collateral in crypto. In other words, the best crypto to borrow against is BTC. That's just because it's the least volatile and the most liquid.
Put simply, BTC's price doesn't move as much relative to altcoins. The only problem is that Bitcoin doesn't support smart contracts, and BTC isn't available on smart contract cryptos like Ethereum. That was until January 2019, when crypto custodian BitGo and a group of DeFi protocols launched Wrapped Bitcoin on Ethereum, making it possible to borrow against WBTC.
Without getting too technical, Wrapping Bitcoin involves locking some amount of BTC on the Bitcoin blockchain to mint an equivalent amount of BTC tokens on another blockchain, in this case, Ethereum. Logically, WBTC could be redeemed for the underlying BTC by burning an equivalent number of tokens. The problem with the original Wrapped Bitcoin was basically that it was difficult to mint and redeem.
Despite this though, WBTC experienced explosive growth during the 2020 DeFi boom. By mid-2021, 1% of BTC's supply had been wrapped on Ethereum. Naturally, it was used mostly as collateral to borrow against in DeFi.
Now, what's fascinating is that WBTC's shortcomings resulted in the creation of competing Wrapped Bitcoin protocols. The most obvious of these was REN BTC, which made it possible for anyone to wrap their BTC for use on multiple blockchains without the need for KYC and other similar hurdles. The less obvious competitors to WBTC were all the centralized crypto borrowing platforms that emerged, like Celsius.
The main reason why these platforms gained so much adoption was arguably because it was difficult to use cryptos like BTC as collateral in order to Of course, the desire to earn a yield played a role too, and the resulting leverage resulted in the downfall of most of these platforms. Fast forward to today, and it looks like history is about to be repeated in a big way. BTC has become an even more ideal form of collateral thanks to the launch of the SpotBitcoin ETFs and associated instruments.
These have undeniably given an extra boost to BTC's price and should lower its volatility. Meanwhile, crypto exchanges like Coinbase have started launching their own Wrapped Bitcoin protocols, making it possible for their users to seamlessly mint and redeem CB BTC on multiple chains. Newsflash, but this means it's going to be very easy to use BTC as collateral in DeFi this time around.
Consider that this will not only result in more stablecoin borrowing and altcoin speculation, but also further increase the demand for BTC. As we saw in the last cycle, a substantial percentage of BTC could be locked in Wrapped Bitcoin protocols, further restricting its supply and supporting its price action. Now consider that we are literally at the beginning of this Wrapped Bitcoin boom.
In the coming months, positive DeFi regulations are likely to be passed in the United States. This is going to accelerate DeFi leverage from all angles, be it via Wrapped BTC or otherwise. As before, this will cause an explosion in altcoin prices.
Altcoins wBTC Could Pump With Leverage
Now, this begs the question of which altcoins will benefit from the Wrapped Bitcoin boom. To find the answer, all we must do is look at the existing forms of Wrapped Bitcoin and which chains they're on.
Note that some of this information comes from a recent report by Cointelegraph Research. Anyways, let's start with the largest Wrapped Bitcoin token, WBTC. Over 140,000 WBTC have been minted and almost all of it exists on Ethereum.
According to the WBTC Network website, the protocol also supports the Base Layer 2, Carver and Osmosis, both Cosmos-based Layer 1s, and Tron, another Layer 1. And that reminds me, as some of you will know, there was some controversy around WBTC earlier this year. The TLDR is that custody of the BTC backing WBTC had been split between BitGo and BitGlobal, a crypto custodian that reportedly has ties to Tron founder Justin Sun, who you'll know is a rather controversial figure. Whether these concerns are warranted doesn't really matter because the outcome is the same.
The fallout is likely to limit WBTC's growth relative to other forms of Wrapped Bitcoin. This is because of DeFi protocols like MakerDAO removing WBTC as collateral and centralized exchanges like Coinbase delisting WBTC. Fortunately or unfortunately, this hasn't completely stopped WBTC from growing or being used in DeFi.
On-chain analytics reveal that WBTC is still being used as collateral in protocols like Aave and Compound. This means that there's going to be lots of borrowing against WBTC, for better or for worse. I'd also be remiss if I didn't mention the fact that Justin Sun claims to own over 28,000 BTC and is known to be a DeFi whale.
It goes without saying that Justin is likely to wrap some of this BTC as WBTC, given his apparent affiliation with Wrapped Bitcoin. His borrowing will give a boost to altcoins. And this ties into the pressing question of which altcoins will benefit.
In the case of WBTC, the answer is ETH and altcoins on Ethereum, given that most of WBTC's supply is on Ethereum. The caveat is that potential WBTC whales like Justin could use their borrowed stablecoins to invest in altcoins on other blockchains. It's safe to say that Justin is likely to bridge some of his dry powder into Tron's ecosystem.
Analyzing the Current State and Future Potential of Hedera Hashgraph (HBAR)
Will Coinbase cbBTC Pump Solana?
Anyhow, next up we have Coinbase's cbBTC, which only launched in September. Since then though, cbBTC has grown exponentially to become the second largest wrapped Bitcoin token by market cap.
Around 18,000 cbBTC have been minted so far on Ethereum, Base and Solana, the three chains it currently supports. Now, you'd be forgiven for thinking that most cbBTC is being minted on Base, given its ties to Coinbase, or Solana, given its high activity and low fees. Surprisingly though, almost 75% of all cbBTC in circulation has been minted on Ethereum so far.
Not so surprisingly, almost all this cbBTC is being used as collateral on Aave. Now, cbBTC is likely to continue growing exponentially on Ethereum and other chains, because it's easy to mint and redeem. To put things into perspective, Coinbase reportedly has close to 100 million users.
Chances are that a few million of them will mint cbBTC to use as collateral in DeFi to borrow stablecoins. In fact, we can use platforms like Celsius and BlockFi to get a sense of how many people could mint cbBTC via Coinbase, and how much cbBTC could be minted. Lo and behold, these platforms reportedly had user bases in the single-digit millions, and had tens of thousands of BTC deposited.
This foreshadows tens of thousands of cbBTC tokens being minted, particularly if Coinbase introduces BTC yield slash savings products to its exchange that plug into cbBTC in the back end. A few of you will know that the SEC was cracking down on Coinbase Earn. This though is almost guaranteed to change in 2025.
And this relates to the pressing question of which altcoins will benefit. Well, in the case of CBBTC, it's honestly still too soon to say, and it's not as straightforward as it was with WBTC. This is precisely because most of the cbBTC that will be minted could come from Coinbase users who will use it for savings rather than borrowing.
The silver lining is that this is likely to drive lots of value to the DeFi protocols that are providing these BTC savings yields with cbBTC in the back end. Right now, this is mostly Aave, but again, this is likely to change as cbBTC grows on other chains and DeFi yield opportunities present themselves elsewhere. From our perspective, the biggest beneficiaries of cbBTC in the future will be altcoins on BASE and Solana.
It stands to reason that Coinbase picked BASE because it's its own layer too. In our view, the reason why Coinbase picked Solana is because it believes that Solana's ecosystem will keep growing. This makes sense when you consider that Solana seems to be following Ethereum one cycle behind. This is true both in terms of Solana's ecosystem growth as well as Sol's potential
tBTC And Decentralized Wrapped bitcoin
The last wrapped Bitcoin protocol we need to cover is tBTC, created by a crypto project called Threshold Network. As you might have guessed, tBTC is a decentralized wrapped Bitcoin token.
It launched in September 2020, and over 5000 tBTC have been minted so far on multiple chains via Ethereum. As with WBTC and cbBTC, almost all of tBTC's supply exists on Ethereum, and over a quarter of it has been supplied as collateral on Aave. June analytics for tBTC reveals that it's been growing as exponentially as cbBTC, and RenBTC's track record suggests tBTC still has a lot of room to grow.
In case it wasn't clear enough, RenBTC was also a decentralized wrapped Bitcoin protocol. Once upon a time, RenBTC's supply hit almost 14,000. RenBTC's supply collapsed to a few hundred though after FTX imploded in 2022.
For context, FTX's sister company Alameda Research acquired the Ren protocol in early 2021. In any case, RenBTC's track record suggests that tBTC could also grow to 14,000 BTC. This would translate to a total wrapped Bitcoin value in the billions that will mostly be used for borrowing in DeFi.
The catch is that tBTC's growth is harder to model given its cross-chain focus and the competition from cbBTC. As I hinted earlier, tBTC exists on multiple chains via Ethereum. Technically, it exists on multiple chains via the wormhole bridge, which it integrated in 2023.
This makes it easy for tBTC on Ethereum to bridge to over 30 blockchains and counting, a selling point that neither WBTC nor cbBTC currently has. At the same time, tBTC doesn't have any onboarding hurdles like KYC. It can be minted and redeemed by anyone, anywhere, anytime.
In theory, then, this makes tBTC the most accessible form of wrapped Bitcoin. In practice, however, this isn't the case given that Coinbase's cbBTC is easier to mint and redeem via the exchange. However, this assumes that DeFi protocols won't be able to provide user experiences that are on par with centralized exchanges.
In case you missed the memo, there's a new niche in crypto called chain abstraction, which effectively lets you access DeFi protocols on multiple chains from a single front end. More importantly, Ethereum and Solana aren't the only ecosystems where DeFi is growing. It's also growing in older ecosystems like Cosmos and newer ecosystems like Aptos and Sui.
These are emerging markets that neither WBTC nor cbBTC are focused on, but ones that cross-chain tBTC could capture. And this pertains to the pressing question of which altcoins will benefit. Well, in the case of tBTC, the honest answer is that we're going to have to wait and see, like with cbBTC.
Thankfully, though, we can watch these flows using tBTC's June analytics dashboard, which shows more and more tBTC going through wormhole.
How Will Wrapped Bitcoin Affect BTC Price?
Now, this begs the biggest question of all, and that's what effect all these wrapped Bitcoin protocols could have on BTC's price.
To refresh your memory, more than 1% of BTC's supply was wrapped in the last cycle. This is impressive given the circumstances, namely bad accessibility and lack of utility in DeFi. Four years later, there are dozens of wrapped Bitcoin protocols with better accessibility and expanded utility in DeFi, not just the three we covered today.
As mentioned earlier, BTC has also become an even better form of crypto collateral due to things like the spot Bitcoin ETFs and the options on them. When you start crunching the numbers, you start to realize that a lot more than 1% of BTC's supply could be wrapped this time around. For starters, we have WBTC, which you'll recall still stands at 140,000 BTC.
WBTC's growth is difficult to forecast given its own circumstances, but could reclaim its all-time highs. Per June Analytics, this could mean over 280,000 BTC being wrapped as WBTC. It's a figure within reach when you remember that Justin Sun is a Bitcoin whale and likely knows lots of other Bitcoin whales who will be more willing to use WBTC because of Justin's apparent affiliation.
Something to think about. Next up, we have CBBTC, which I'll remind you is probably going to be analogous to the Bitcoin yield products that were offered by the likes of Celsius. When you factor in the positive crypto regulations coming down the pipe in the US, it looks likely that CBBTC will grow as big as WBTC did in the last cycle.
This would mean another 280,000 BTC being wrapped as CBBTC, a figure that could easily grow much higher because Coinbase is so user-friendly and because DeFi itself is becoming more accessible to retail. The latter will be a tailwind for TBTC, which should grow at least as large as RENBTC did, if not much more. And when you factor in all the other centralized and decentralized wrapped Bitcoin protocols, you notice that close to 1 million BTC could be wrapped.
That would be around 5% of BTC's total supply. And if that figure sounds familiar, that's because the spot Bitcoin ETFs held more than 5% of BTC's supply as of November. Whereas most of the BTC in the spot Bitcoin ETFs can move at any time, most of the wrapped BTC on-chain will be locked up in DeFi to all intents and purposes.
Again, this restriction in circulating supply would be supportive of BTC's price around the margins, assuming demand stays the same or rises. And the higher that BTC's price goes, the more leverage that wrapped Bitcoin holders will take on. If we assume a BTC cycle top of around $150,000, 1 million wrapped BTC works out to $150 billion worth of BTC on other chains, and tens of billions of dollars of stablecoins being borrowed against it to buy alts.
I'll repeat that the altcoins which will benefit the most from this wrapped Bitcoin boom are likely to be ETH, SOL, altcoins in Ethereum's and Solana's ecosystems, the other smart contract cryptos these wrapped Bitcoin protocols expand to, and the altcoins in their ecosystems.
It's too soon to say what they will be, but it's not too soon to warn what the outcome of all the resulting leverage will be.
Why Wrapped Bitcoin Leverage Could Cause The Next Crash
And so this brings me to the question of why all this wrapped Bitcoin could be a contributing factor to the next crypto market crash, specifically the one that kicks off the start of the next crypto bear market.
The short answer is because this is what's happened in every crypto cycle. Leverage is the historic cause of crashes. On the way up, wrapped Bitcoin will help propel the crypto market higher, because people will borrow tens of billions of dollars of stablecoins against WBTC, cbBTC, tBTC, and others in order to buy altcoins.
As these altcoins rally, so too will the desire to take on even more leverage using wrapped Bitcoin in DeFi. At some point though, the borrowing will stop, either because altcoin prices have started falling fast, or because BTC's price has started falling fast. In the former case, this would result in a wave of altcoin sales into stablecoins to repay the BTC-backed leverage.
In the latter case, this would result in a wave of wrapped Bitcoin liquidations. And this is where things get interesting again. Wrapping Bitcoin makes it easy to forget that tokens like WBTC, cbBTC and tBTC do not exist natively on the chains they're on.
They're backed by BTC and are therefore native to Bitcoin. This means that liquidity is lower and redemptions are more difficult to process. For instance, imagine a scenario where $100m of cbBTC collateral is liquidated on Aave, but cbBTC only has $50m of market depth on the chain in question.
This liquidation could cause cbBTC's on-chain price to temporarily collapse to zero, causing a wave of additional cbBTC liquidations. Besides the fact that this could cause a shortfall for Aave, it could also trigger a collapse in confidence in cbBTC and a rush of redemptions for BTC on Coinbase. If Coinbase doesn't have the BTC on hand to meet cbBTC redemptions and any associated BTC withdrawals, it could lead to a run on Coinbase.
In turn, this would crash the crypto market like FTX did in late 2022, maybe marking the bear market low. Now, to be clear, this exact scenario is objectively unlikely to occur. It's just intended to illustrate a realistic chain of events that could unfold because of hundreds of millions of dollars of loans backed by wrapped Bitcoin on dozens of blockchains being liquidated.
Something along these lines seems perhaps inevitable. After all, it was the collapse of Terra's UST stablecoin in May 2022 that ultimately led to the collapse of FTX. A blow-up in DeFi eventually led to a blow-up in CeFi.
The difference this time is that the rising integration of Bitcoin into TradFi means that next time the blow-up could hit TradFi hard too. For what it's worth, it could be an amazing buying opportunity. But, well, let's get that dry powder first, eh?