Small Bitcoin addresses plunge to 4-month low, but is this bearish?

The number of Bitcoin (BTC) addresses holding 1 BTC plummeted to a four-month low on Sep. 20, according to the data from Glassnode. But it is premature to suggest that it is a bearish sign for the top cryptocurrency.

What caused the number of small Bitcoin addresses to sharply drop?

The noticeable decline in small Bitcoin addresses coincides with the explosive expansion of the decentralized finance (DeFi) market.

Since Aug. 1, the total value locked in DeFi protocols on Ethereum rose from $4.091 billion to $9.77 billion. The massive increase of capital in DeFi caused the demand for tokens like Wrapped Bitcoin (wBTC) to surge.

The total value locked in DeFi. Source: Defipulse.com

Users primarily utilize DeFi protocols to earn yield with their cryptocurrency holdings. Since it is not possible to transfer Bitcoin to Ethereum, users convert BTC to wBTC, and then use wBTC on DeFi platforms.

Using wBTC to gain exposure to DeFi platforms and yield allows Bitcoin holders to achieve two things. First, BTC users can still utilize DeFi protocols without selling BTC. Second, Bitcoin investors do not lose the potential upside from BTC’s price movements.

The number of small Bitcoin addresses holding 1 BTC likely dropped as the demand for wBTC increased. Users might have converted their BTC to wBTC, as the popularity of DeFi rose.

In July, Jack Purdy, a researcher at Messari said the dominance of wBTC would likely continue over the short to medium term. He said:

“For these reasons, wBTC is poised to continue its dominance in the short to medium term. That being said, there’s still the looming threat of government intervention once these assets grow large enough to catch the regulator’s attention.”

But the decline in small addresses and the upsurge of wBTC do not necessarily hint at a bearish trend for Bitcoin.

Eventually, when users decide to pull their wBTC out of DeFi protocols, they would convert them back to BTC. If the addresses moved BTC to Ethereum’s wBTC, it does not indicate that the users sold BTC.

Instead, it suggests that it might be a short-term trend that might last until the end of the ongoing DeFi cycle.

wBTC is accelerating to $1 billion

On Sep. 18, Skew reported that the value of wBTC is accelerating towards $1 billion. According to data from CoinMarketCap, 76,047 wBTC are currently in circulation suggesting more users are transferring BTC to Ethereum-based DeFi platforms for yield.

The wBTC market cap. Source: Skew

Since wBTC represents the exact value of 1 BTC, it is not a bearish trend for Bitcoin over the longer term. In fact, one could argue it is a positive metric because users are reluctant towards missing out on potential BTC upside.

While DeFi platforms allowing users to gain yield using wBTC are profitable, there exist high-risk and high-return pools. The rising market capitalization of wBTC suggests many users do not want to risk losing out on a potential BTC rally.