The surging borrowing rates in the Ethereum network may send “ripple effects across the Ethereum ecosystem,” says a crypto researcher.
Ether may be heading for an unstable period in the near term, as the cost of borrowing wrapped Ether has spiked and technical indicators point to overvaluation, according to a crypto analyst.
“We believe Ethereum is looking vulnerable in the near term,” 10x Research head of research Markus Thielen told Cointelegraph on Wednesday.
“The market is entering a quieter summer stretch — particularly in the US during August — while technical indicators remain deeply overbought.”
Thielen explained that a significant risk for Ether’s (ETH) price is the declining profit opportunities of borrowing wrapped Ether (wETH) — a tokenized version of ETH widely used across decentralized finance (DeFi) platforms.
Ether is trading at $3,623 at the time of publication, up 49% over the past 30 days, according to Nansen. The asset’s relative strength against Bitcoin (BTC) has surged 34% over the same period, according to TradingView’s ETH/BTC ratio.
According to Thielen’s market report on Wednesday, the use of lending platform Aave (AAVE) has climbed from 86% to 95% since July 8, as borrowing has outpaced the supply available in the lending pool.
“The variable cost of borrowing wETH has gone up and it’s unprofitable to borrow ETH now, hence there should be more unwinding of those who have borrowed ETH on Aave,” Thielen explained.
“If this persists, it could trigger a meaningful unwinding, especially with funding rates and positioning still stretched,” he added.
Thielen explained that most of this borrowing demand comes from traders using leverage in staking strategies to boost yield. However, he added that the current market environment has diminished the profitability of these trades:
“These so-called ‘looping’ strategies only remain profitable when ETH borrow rates are low and the stETH-to-ETH peg remains stable.”
Thielen said that over 90% of Ether loans use variable interest rates, leaving borrowers exposed to sudden increases in borrowing costs.
Related: Ether emerges as winner after crypto’s ‘watershed moment’: Bitwise
He said that when those variable rates rise as they have recently, it can “send ripple effects across the Ethereum ecosystem.”
Despite possible headwinds in the short term, Thielen expects a more favorable setup for Ether after September.
Historically, Q3 has been the second-worst-performing quarter for Ether, averaging a return of 8.19% since 2013, while Q4 is typically the strongest, with an average return of 22.59%, according to CoinGlass data.
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This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
