With bitcoin approaching all-time highs amid strong spot exchange-traded fund inflows, analysts at research and brokerage firm Bernstein anticipate a “big bang” DeFi recovery to come next.

While the bitcoin rally can be attributed to the spot ETFs, following all-time highs for bitcoin above around $69,000, a broader-based market recovery is expected to be led by the DeFi niche — accounting for six of the ten largest revenue-producing protocols in crypto, Bernstein analysts Gautam Chhugani and Mahika Sapra wrote in a note on Monday.

The DeFi segment got “completely wiped out” during the last cycle, playing a game of unsustainable yields driven by subsidies from token incentives (inflation) that ultimately came crashing down, the analysts argued.

This was exemplified by the collapse of the Terra ecosystem in May 2022, with DeFi protocol Anchor once promising 20% yields on the stablecoin TerraUSD, backed by the Terra governance token Luna. Once Luna’s token price crashed, the rest of the Terra ecosystem went with it — wiping out some $40 billion of investor wealth in a few days.

But this time, the yield is real, the analysts said, accruing value based on the fees generated by the underlying application. Chhugani and Sapra cited Uniswap as an example amid its recently proposed fee-sharing mechanism for UNI token stakers. The largest decentralized spot exchange generated $2 billion in trading volume during the last 24 hours — more than 50% of centralized exchange Coinbase’s trading volume — and is the largest DeFi fee-generating protocol at around $3.7 million per day.

With the fee-sharing vote currently underway, it could “transform the token from a simple ‘voting’ token to a token with a yield, earned via protocol user fees,” the analysts said, adding, “we expect multiple DeFi protocols to follow.”

Chhugani and Sapra noted concerns around the Securities and Exchange Commission’s suggestion that all cryptocurrencies, excluding bitcoin, may be securities — though the crypto industry sees them as tokens connected to permissionless protocols without a specific investment contract.

“This is the fundamental question in the Coinbase vs SEC case, which names 12 tokens as securities, alleging Coinbase as an unregistered securities exchange,” the Bernstein analysts said. “As the courts in recent times have typically exercised more nuance than the blanket arguments followed by SEC (as seen in the Ripple vs SEC case), we believe the crypto industry is sensing an opportunity to change the ‘legal’ narrative on tokens.” Bernstein has a 15% allocation to DeFi in its digital assets portfolio — up 15% year-to-date, they added.

This comes as the total value locked in DeFi has surged 50% since the year’s start, moving from $60 billion to over $97 billion, based on The Block's data dashboard.

Spot bitcoin ETF inflows push bitcoin toward new highs

Despite continued significant outflows from Grayscale’s converted GBTC fund, U.S. spot Bitcoin BTC -4.36% ETFs continue to accumulate net inflows overall — now accounting for a total net inflow of $7.4 billion. On Thursday, BlackRock’s IBIT became the first new spot Bitcoin ETF to reach $10 billion in assets under management after securing its second-largest daily inflows since launching on Jan. 11.

“We are not surprised that the bitcoin market price remains resilient and we expect the dips to be shallow and bought aggressively,” Chhugani and Sapra said. “We continue to expect bitcoin to touch all-time-highs this year, crossing its 2021 peak of $69,000.”

“Further, with regulatory clarity, in the future, we would not be surprised to see the global asset managers make the move towards a possible DeFI ETF and specific active DeFi funds,” they added. 

Bitcoin’s price broke above $65,000 earlier today and made new all-time highs in Europe above €60,000. Bitcoin is currently trading at $65,174, up over 5% in the past 24 hours and 27% during the past week, gaining more than 50% year-to-date, according to The Block’s price page.