Santiment analytics platform has highlighted how DeFi lending and borrowing metrics can provide deeper insights into crypto market cycles.
The firm emphasized that monitoring interest rates, debt levels, and liquidation trends can help investors determine when markets are overheating or bottoming out.
Lending and borrowing data offer market insights
According to Santiment, lending and borrowing data can be valuable for traders looking beyond price movements and social sentiment. The platform stated that these metrics could indicate market extremes, highlighting overheating phases requiring caution and cooling phases that may present buying opportunities.
The firm introduced the concept of the “Value of Money,” where interest rates on lending platforms such as Aave and Compound reflect capital supply and demand. When borrowing demand rises, interest rates increase. Santiment noted that extreme spikes in interest rates often signal market tops, while consistently low rates may suggest market bottoms.
Key indicators include the stablecoin supply rate, borrowing rate, and the supply/borrow ratio. Interest rates exceeding 10-15% often indicate overheated conditions, as borrowers pay high costs for leverage. Falling rates suggest reduced demand for leverage and a cooling market. The platform added that stable rates between 3-4% over several weeks typically signal reduced speculation and potential market bottoming. A reliable indicator occurs when rates surge above normal levels and remain stable for two to four weeks.
Liquidation metrics and market analysis
Santiment also introduced the “Blood on the Streets” liquidation metric, which can provide insights into crypto market cycles. Liquidation happens when a borrower’s collateral value falls below the required threshold, leading to forced sales. These events can create market pressure and indicate capitulation phases.
The firm explained that large liquidation spikes and declining total debt levels often mark market bottoms. Key indicators include total liquidations, which measure the dollar value of closed positions, and total debt changes, which track fluctuations in borrowed amounts. The platform also noted that repayments, where borrowers voluntarily reduce their debt, could signal market reversals.
Most liquidations result from long leverage positions where participants borrow stablecoins to buy more crypto. Short liquidations occur when investors borrow crypto against stablecoins to bet on price drops. Long liquidations are more frequent and typically happen during market declines, while short liquidations occur during sudden price increases.
Open Interest and Funding Rate as Indicators
According to Santiment, market analysis becomes more potent through total open interest metrics. The value of all existing futures contracts constitutes this total metric. Market participants with high open interest positions can face potential corrections because of excessive leverage when prices rise. The company emphasized that funding rates demonstrate the differential between perpetual and regular futures.Â
Traders pay fees in favorable funding rates when extending their contracts to those who enter positions at shorter durations. Short traders make payments to long traders within negative rate conditions and such arrangements frequently indicate bearish market sentiments. Markets tend to rebound after short liquidations because negative funding rates appear before price appreciation starts.