Avalanche's bull trap
In 2023, Avalanche (AVAX) doubled in value to reach $21, showing some of the best gains in the Top 20 biggest coins by market capitalisation. The driver behind this growth was news of a fully-fledged partnership with Amazon. However, the metrics paint a picture of premature optimism and suggest that investors risk falling into a bull trap.
On 12 January, we wrote about a partnership agreeement reached between Avalanche and AWS which would see Amazon's cloud services users granted access to new services based on blockchain solutions. As soon as the news was released, the coin shot up 66%.
Over the four days that followed, bears made severe losses as the total amount of funds liquidated exceeded $10 million.
The triggerring of a significant number of stop loss orders led to even greater price rises and the emergence of excessive optimistic sentiment. As of 24 January, the lending rate has been well and truly in positive territory. This would suggest that bulls outnumber bears in open futures contracts. As a result, a sudden dip in the coin's price below $18 will tip the scales in the opposite direction, meanings bulls will take significant losses from the subsequent liquidation of positions.
The absence of positive fundamentals would indicate that such a scenario is highly likely. Indeed, the total transaction volume has been in decline since Autumn 2022, while the number of active wallet addresses is close to an annual low.
There has also been a significant drop in demand for AVAX in the DeFi sector, where the volume of blocked funds has fallen 33% to 46.7 million coins this year alone. To put this into perspective, Tron has increased its TVL by 4% to 78.6 million coins over this same period.
The partnership with AWS proved an excellent marketing ploy, but the hard metrics simply didn't manage to generate a meaningful spike in demand for the Avalanche network. As a consequence, the current situation could easily turn into a bull trap for investors.
StormGain Analytics Team
(a cryptocurrency trading, exchange and storage platform)