How borrow rates reveal turning points in the market

Assets covered: $BTC, $USDC

Metrics used: Price, AAVE borrow APY


After a great start to 2023, the markets saw increased confidence that we might have bottomed.

Let's take a look at borrow rates and how it reveals turning points in the market.

Borrowing stables to long

USDC borrow rates on AAVE - Sanbase

Only one thing to do with stables when you borrow it, and that is to long the market. Since Sept 2022, the borrowing behavior has changed a little, we are seeing growing borrow rates (indicative that more stables are being borrowed) as BTC's support held.

Things were looking pretty good until the FTX saga messed things up (it was during this time that S&P rallied while Crypto had its own implosion) as folks became spooked by the scale of damage.

This soon fizzled out as borrow rates started to climb again in late Nov 2022. Then came a sharp uptake that coincided in the price rally at the start of the year as borrowed money went into pumping the markets.

This growing confidence of market participants can be good for a start of a new run as money needs to flow to push prices, but it also needs continuation.

Without it, skyrocketing rates with high confidence levels can signal things that are topping out as the last person to borrow enters.

Borrowing to short

WBTC borrow rates on AAVE - Sanbase

Back in 2022, as prices tanked, there was growing confidence in shorting the market as we can see in the spike in borrow rates in Aug and Sept 2022. It worked pretty the start.

But this growing confidence took a turn as shorters got too overconfident that the support will 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 WBTC borrow dropping like hot cakes as no one is that confident to short it any longer.


Disclaimer: The opinions expressed in the post are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

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