10 Apr

The sustainability of the current bull run in Bitcoin (BTC) has come under scrutiny due to its recent volatility and failure to stabilize above the $70,000 threshold.

But according to market analyst and Capriole Invest co-founder Charles Edwards, Ethena Labs' (ENA) decentralized finance (DeFi) protocol has the potential to greatly prolong and accelerate Bitcoin's bull market to unprecedented heights.
Edwards recently made the argument that Ethena's initiatives, like limiting over-leverage in derivatives markets and lowering spot supply, can drive up the price of Bitcoin for an extended amount of time in a post on the social media platform X (previously Twitter).

Bull Market Blow for Bitcoin

To give additional background on why Edwards is bringing up this possibility, Ethena Labs declared on April 4th that it would be participating in a Bitcoin cash-and-carry transaction.
By purchasing and shorting Bitcoin, Ethena Labs can reduce risk and give its product a more reliable foundation, according to the protocol's release.

Edwards emphasizes Ethena's capacity to limit excessive leverage in Bitcoin derivatives markets as one of the important elements. Ethena hopes to avoid excessive risk-taking and possible market volatility by doing this.

Furthermore, by removing spot supply from the market, Ethena may lessen the pressure on sellers, sustaining the price of Bitcoin and extending the bull market.

The protocol also mentioned how better scalable and liquid the Bitcoin derivative markets are than Ethereum (ETH). According to reports, Ethena uses Bitcoin as an asset for delta hedging, a risk management technique, because of this feature.

With $25 billion in open interest in Bitcoin that Ethena can use to delta hedge, its synthetic dollar product, USDe, can now scale much more easily. In their statement, Ethena Labs mentioned the following:

While ETH open interest on major exchanges (apart from CME) has increased from $5 to $10 billion in just a year, BTC derivative markets have expanded faster than ETH and provide better scalability and liquidity for delta hedging.

Calculating the Risks

Although Edwards is upbeat about Ethena's influence on the Bitcoin bull market, a user expressed worries about possible drawbacks. Edwards agrees that there could be negative consequences from execution risks like custody or delta neutrality failure.

Custody risk is the biggest concern in this situation, according to Edwards. He does, however, point out that any negative effects are probably going to be temporary and that in the end, Ethena's net annual percentage yield (APY) will be determined by market forces.

April 2024, Cryptoniteuae

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