- Borrowing costs for wrapped Ether (wETH) have increased sharply, making leveraged strategies less attractive.
- Technical indicators suggest Ether (ETH) may be overvalued in the short term.
- Lending activity on Aave climbed from 86% to 95%, with borrowing demands surpassing available liquidity.
- More than 90% of ETH loans have variable rates, increasing risk for borrowers if rates rise further.
- Analysts expect current challenges to ease after September, historically a stronger period for Ether performance.
Ether (ETH) could face higher volatility in the near future, after a steep increase in the cost of borrowing wrapped Ether and signs that the cryptocurrency may be overbought. Markus Thielen, head of research at 10x Research, shared these views on Wednesday, noting potential risks for Ether’s price.
Borrowing demand for wrapped Ether (wETH), a token that represents ETH and is commonly used in decentralized finance (DeFi), reached a point where the cost of borrowing has risen. At the time of reporting, Ether traded at $3,623, up 49% over the past month, while its strength compared to Bitcoin rose 34% during the same period, according to Ethereum&tab=transactions” rel=”noopener nofollow”>Nansen and TradingView data.
“We believe Ethereum is looking vulnerable in the near term,” Thielen told Cointelegraph. He pointed out that activity on the lending platform Aave increased from 86% to 95% since July 8, as borrowing exceeded the available supply in the platform’s 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,” he stated.
Thielen explained that demand to borrow ETH mostly comes from traders using “looping” strategies—borrowing ETH to boost returns through staking. “These so-called ‘looping’ strategies only remain profitable when ETH borrow rates are low and the stETH-to-ETH peg remains stable,” he said. Over 90% of Ether loans are set at variable interest rates, which leaves borrowers exposed if rates continue to rise. “If this persists, it could trigger a meaningful unwinding, especially with funding rates and positioning still stretched,” he added. When borrowing rates rise, this can cause Ripple effects across the Ethereum system.
Although challenges might continue through August, Thielen expects conditions for Ether to improve after September. Data from CoinGlass shows that the third quarter usually sees lower average returns for Ether, while the fourth quarter has historically performed strongest.
This article does not include investment advice or recommendations. Trading and investing carry risks, and readers should conduct their own research before making financial decisions.
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