- Ever since crypto prices tanked at the end of 2022, the question has been – was that indeed THE bottom?
- Lending and borrowing rates show cycles of “overheating” and “cooling down” and hence can be used to tell market tops or bottoms.
- The truth is, it is not easy to tell where the crypto market is headed. No one knows the future with certainty.
Given the current tensions in the market, players could be wondering what’s going on and what it means for the future of crypto. With the ongoing crypto banking crisis, the truth may not be that hard to see. We are just finding it hard to accept.
Since crypto prices crashed in the wake of the FTX collapse in November 2022, the question has remained whether the market has bottomed. The question seemed to disappear at the turn of the year as Bitcoin led the market in recovery as many started to believe that 2023 would be a bull market.
This was a “bull trap,” as yet another downturn invalidated the bullish narrative. So, what does the crypto market outlook look like? Have we bottomed, or are there more losses ahead?
Santiment, a market behavior and on-chain data analysis firm, has tried to make assumptions using a data-specific framework in its monthly review. Let’s dig in.
How Do You Spot “The Bottom”?
According to Santiment, “the bottom” usually has specific “clear characteristics.” These include:
- Very few market participants believe that the market will go up. Instead, the crowd sentiment says, “the move down will continue.”
- Only the whales (large investors) are accumulating. Retailers are either panicking or staying flat with their token balances.
- The interest rates on various lending/borrowing protocols have decreased and remain low (AAVE, Compound, etc.)
- Plenty of “Age Consumed” coins are being moved, confirming the panic.
- The crypto “naysayers” say, “the bear market is back and is here to stay.”
How To Use Borrow Rates To Reveal Market Turning Points
Santiment used lending and borrowing rates on AAVE to identify cycles of “overheating” and “cooling down.”
USDC Borrow Rates On Aave
There is only one reason why traders borrow stablecoins, and that is to go long an asset. This behavior has changed slightly since September 2022 as borrowing rates grew. From the chart above, it can be seen that more USDC stablecoins were borrowed as Bitcoin held its support.
It was all looking good until the FTX fiasco messed things up. The S&P rallied as the crypto market implosion sent prices downward as investors reeled under the scale of the damage.
This soon oozed out as borrowing rates began rising again at the end of November, followed by a sharp uptake that fueled the price rally at the start of the New Year.
This growing confidence of market participants can be good for a start of a new run, as money needs to flow to push prices. However, without continuation, skyrocketing rates with high confidence levels can be a sign that things are topping out, suggesting that a market downturn is on the radar.
WBTC Borrow Rates On Aave
Note that in 2022, there was growing confidence in shorting the market as prices plummeted while Wrapped BTC (WBTC) borrow rates spiked in August and September 2022, as observed by Santiment analysts. This was working well at the beginning.
But this growing confidence made a U-turn as shorters got too overconfident that the support would break and went on a massive WBTC borrow that saw its highest spike in a year. This backfired and signaled the recent bottom.
The past few months have seen a massive drop in WBTC borrow rates as no one is that confident to short it any longer.
In summary, if stablecoins borrow rates increase, it is usually a sign that the traders want to go long on cryptos like BTC and, as such, signals a market turn-up. However, if the borrowing doesn’t continue, there are no stablecoins to sustain the buying, causing a downturn. Similarly, traders may borrow WBTC to stake and earn more interest. But when the borrowing stops, it shows they are losing confidence that the asset can hold specific support, signaling a bottom as the prices increase.
Although this helps signal where the market is going, they cannot tell whether it has bottomed. In concluding on the market outlook and where it is headed, Santiment states:
“The truth is – no one knows. It’s probably not the answer we want to hear, but that’s the truth. No one knows the future.”
When writing, Bitcoin traded at $24,391, up 10% daily. However, the big crypto traded 65% below its peak in November 2021.
