The recent volatility in the Bitcoin (BTC) price and its struggle to consolidate above the $70,000 mark has raised questions about the sustainability of its ongoing bull run.
However, market expert Charles Edwards, co-founder of Capriole Invest, believes that the decentralized finance (DeFi) protocol Ethena Labs (ENA) could significantly extend and boost Bitcoin’s bull market to new heights.
In a recent post on social media site X (formerly Twitter), Edwards suggested that Ethena’s actions, such as constraining over-leverage in derivatives markets and reducing spot supply, can propel Bitcoin’s price higher for a longer period.
Bitcoin Bull Market Boost
To provide further context as to why Edwards is suggesting this possibility, on April 4th, Ethena Labs announced its intention to engage in a cash-and-carry trade involving Bitcoin.
According to the protocol’s announcement, Ethena Labs can manage risk and provide a more stable backing for its product by buying and shorting Bitcoin.
One of the key factors Edwards highlights is Ethena’s ability to constrain over-leverage in Bitcoin derivatives markets. By doing so, Ethena aims to prevent excessive risk-taking and potential market instability.
Additionally, Ethena’s taking spot supply off the market can reduce selling pressure, thus supporting Bitcoin’s price and prolonging the bull market.
The protocol also noted that Bitcoin derivative markets offer superior scalability and liquidity compared to Ethereum (ETH). This characteristic reportedly makes Bitcoin a suitable asset for delta hedging, a risk management strategy employed by Ethena.
With $25 billion of Bitcoin open interest available for Ethena to delta hedge, the capacity for its synthetic dollar product, USDe, to scale has increased significantly. Ethena Labs noted in their announcement the following:
In just 1 year, BTC open interest on major exchanges (exc. CME) has grown from $10bn to $25bn, while ETH OI has grown from $5 to $10bn BTC derivative markets are growing at a faster pace than ETH and offer better scalability and liquidity for delta hedging
Weighing The Risks
While Edwards’ statement is optimistic about Ethena’s impact on Bitcoin’s bull market, one user raised concerns about potential downsides. Edwards acknowledges that execution risks, such as custody failure or delta neutrality failure, could have adverse effects.
Edwards identifies custody risk as the most significant risk in this context. However, he highlights that any negative impacts will likely be short-lived, and market forces will ultimately dictate Ethena’s net annual percentage yield (APY).
In short, by limiting over-leveraging in future markets and reducing spot supply, Ethena could significantly support the price of BTC and extend the current bull run.
Currently, BTC’s price has experienced a significant decline, plummeting to the $68,800 level. This marks a 4.3% decrease compared to Monday’s price.
In parallel, Ethena’s native token, ENA, has also followed the overall downtrend of the market, reflecting BTC’s price movement with a 4% decrease. Presently, ENA is trading at $1.22.
Featured image from Shutterstock, chart from TradingView.com