DAI’s Market Cap Could Be Used to Predict ETH Price
Price predictions are the crypto industry’s favorite game—everyone from stock market veterans to small day traders constantly racing to give their take on why a price of a digital asset is set to rise or fall.
While Bitcoin’s price has often been tied with the performance of the stock and commodities markets, the rest of the crypto market has seen its price-performance tied closely to that of Bitcoin. With numerous factors affecting the price of thousands of coins, using the most common macros such as the number of active addresses and trading volumes has been the most common way to predict price movements.
Despite being the second-largest cryptocurrency by market cap, Ethereum is no different. Aside from the volumes on its DeFi apps, very few metrics have been found to correlate with its price movements.
However, according to the latest data from cryptocurrency research and analytics company Santiment, everyone has been overlooking a very simple but important metric that has historically indicated price movements on Ethereum.
In a May 14 tweet, the company shared its revealing insight—that the market capitalization of DAI can often foreshadow the price of ether (ETH).
Santiment explained that this metric is often overlooked because few thought of using a stablecoin such as DAI, whose value is always pegged at or near $1, as a way to predict how the price of ether will move.
While the company acknowledged that DAI’s price is useless in this case, its market capitalization certainly isn’t.
To understand how DAI’s market cap affects Ethereum, one must understand how DAI works. DAI is a stablecoin developed by Maker, a decentralized protocol built on top of Ethereum. Maker offers users a smart contract platform that backs and stabilizes DAI through a series of dynamic feedback systems called collateralized debt positions (CDPs). CDPs then enable users to deposit an asset into a smart contract as collateral for a loan, which is issued in DAI.
Therefore, users can deposit either USDC or ETH into a Maker smart contract, get the USD equivalent of DAI, and then use DAI as they would any other cryptocurrency. And since DAI is pegged to the U.S. dollar, users only owe back what they initially borrowed plus the accumulated interest.
The more DAI is issued, the more its market cap increases. And as most users either deposit ETH or use DAI on Ethereum network dApps, an increase in its market cap could be used to foreshadow an increase in Ethereum’s price.
Santiment’s data showed that in the past three months, the movement of DAI’s market cap moved almost exactly like Ethereum’s price.
Graph comparing the price of Ethereum with DAI’s market capitalization from February 2020 to May 2020
“This can be a great under-the-radar metric to follow to foreshadow Ethereum’s next move upward and beyond its recent $226 barrier,” the company wrote on Twitter.
With DAI’s market cap currently stable at around $110 million, Santiment believes that any increase to this number could happen at the same time as a major price movement of ether.