Why This Options Trader is Bearish on the Hot DeFi Token Compound

Tony "The Bull" Severino

5 years ago

2 mins read

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Decentralized finance has become the talk of the cryptocurrency market in 2020. The most recent buzz phrase surrounded in hype is “yield-farming,” and at the center of it, a DeFi token called Compound (COMP).

But what exactly is Compound and yield-farming, and if it’s such a hot topic, then why is one options trader so bearish on the token?

What is Yield-Farming? Learn About The Latest Craze in Decentralized Finance

It was the DeFi craze of late 2019 that helped the cryptocurrency market find a bottom. From the start of 2020 to around mid-Feb, Bitcoin rallied, bringing the rest of the market with it.

Ethereum outperformed the leading cryptocurrency by market cap, namely due to the growing amount of ETH locked up in decentralized finance applications.

Investors feverishly buying up the Ethereum supply to lock it away in applications caused the asset to grow over 100% before Black Thursday erased all gains.

While prices have not returned to previous highs, the frenzy around DeFi certainly has.

But Ethereum isn’t taking the center stage anymore. Tokens living on its protocol aimed at different forms of DeFi have stolen the limelight. In particular, Compound (COMP) has become the hottest cryptocurrency token around.

When it comes to DeFi, Compound in less than month captured a lion’s share of the market share, even beating out Maker and other top DeFi altcoins.

Compound can be used for something called yield-farming. It’s a new trend taking crypto by storm. Yield-farming leveraging a DeFi product or service to farm interest rewards by lending out other crypto tokens. In one example, someone was able to earn 45% APY by leveraging their Basic Attention Tokens using Compound.

Not only did Compound spike, but so did many of the assets that can be used to leverage for yield farming also saw rallies recently.

1/ I'm short on $COMP, the fundamentals of the 'governance', given the public information, don't make too much sense today.

Won't be surprised to see it fall below $100 unless a revenue model is proposed soon. – Read full thread..

— TS ⚡️ (@thetaseek) July 2, 2020

Why Is This Options Trader Shorting Compound, The Hottest Crypto Token Going?

So why then, if there’s so much buzz surrounding not only DeFi, but Compound and yield-farming, is one options trader so bearish?

For one, what goes up, must come down. And Compound has enjoyed explosive gains since first being listed on Coinbase last month. Listings of this kind don’t normally have much impact these days, but occasionally it leads to a pump.

The initial buzz wearing off could lead to a short-term pullback for indicators to reset. But this options trader is preparing to “short” Compound due to confusing “governance” fundamentals.

Compound COMPUSD 4H | Source: TradingView

His reasoning is that the token’s underlying protocol is an AUM business, which stands for assets under management. Because the asset’s market cap is at $2 billion and $1 billion of it is assets under management, the trader says the fair market value of the asset is much less.

COMPUSD is currently trading at $180, after trading nearly $100 higher just a week ago. This options trader says, however, the fair market value is closer to $50, and the asset is due for a steep drop.

Tony "The Bull" Severino

Tony "The Bull" Severino, CMT, is a distinguished figure in the cryptocurrency analysis sector, renowned for his in-depth technical expertise and innovative approach to market trends. As the Head of Research at NewsBTC, Tony leads a team dedicated to providing cutting-edge insights and forecasts, helping both novice and experienced traders navigate the complexities of the crypto market.
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Before his ascent in the financial analysis world, Tony honed his skills in journalism. His background in this field has endowed him with a unique ability to present intricate market dynamics in a clear and compelling manner, making his insights highly sought after by a broad audience that ranges from casual readers to professional traders.
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Tony’s nickname, "The Bull," aptly reflects his aggressive and optimistic outlook on the cryptocurrency markets. His forecasts often anticipate significant upturns, earning him a reputation for bullish predictions that have frequently led to lucrative outcomes for those who follow his advice.

In summary, Tony "The Bull" Severino, CMT, is more than just a technical analyst; he is a mentor, educator, and innovator whose influence in the cryptocurrency space continues to grow. His dedication to advancing the understanding of market forces and his commitment to providing high-quality, reliable analysis make him a pivotal figure in the world of cryptocurrency trading.

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