The drop in Ethereum futures shows that traders expect ETH to go higher and everyone wants free proof of hard work, but investors need to watch out for bears as well.
The impressive 85% gain over the past 30 days has surprised even large investors, making the $800 range seen in mid-July look like centuries ago. The bulls are now hoping for support at $1900, but the derivatives metrics tell a very different story and the data shows that professional traders remain very skeptical.
One-day Ether price index, in USD. Source: TradingView
It is important to remember that the leading cryptocurrency is Bitcoin.
28% gain in the same period. Therefore, there should be no doubt that Ether’s upside is being driven by the prospect of consolidation, and a move to a proof-of-stake (PoS) consensus network.
Goerli was the last remaining Ethereum testnet slated to implement Merge, which officially became a proof-of-stake blockchain as of August 11 at 1:45 UTC. Mainnet transmission on September 15th or 16th.
There is a logic behind the increasing expectations of investors for this important shift. This type of multi-stage upgrade aims to increase scalability and very low fees due to the parallel processing mechanism. However, the only change in Merge is the complete removal of the cumbersome mining mechanism.
In short, parabolic inflation will drop dramatically as miners will no longer need to be compensated with freshly minted coins. However, merge does not address the processing limit or the amount of data that can be validated and added to each block.
Therefore, analyzing the derivatives data is valuable in understanding how confident investors are that Ether will continue to rise and head towards $2,000 or more.
The Ether futures premium has been negative since August 1st.
Quarterly futures contracts are often avoided by retail traders due to the price difference from the spot markets. However, they are the preferred tools for professional traders as they prevent constant volatility in contract funding rates.
These fixed monthly contracts often trade at a slight premium in the spot markets as investors demand more funds to stop settlement. This situation is not limited to the cryptocurrency markets. As a result, futures contracts must trade at a premium of 4% to 8% per annum in healthy markets.
Annual installment for 3 months of Ether. Source: Laevitas
The ether futures premium entered negative territory on August 1, indicating increased demand for bearish bets. This is often an alarming sign known as “regression”.
According to a post by Roshon Patel, former Vice President of Genesis Trading, Ethereum futures have rebounded due to Ethereum’s “split potential” which means that traders are offsetting their upside risk by taking negative positions on the futures contract.
Traders should also analyze the Ether options markets to rule out externalities specific to the futures instrument. For example, a delta deviation of 25% indicates that market makers and arbitrage schedules are overcharging for up or down protection.
In bull markets, options traders give higher price growth rates, causing the skew index to drop below -12%. On the other hand, generalized panic in the market causes a positive deviation of 12% or higher.
30-Day Ether Options 25% Delta Turnaround: Source: Laevitas
The 30-day delta fell to -4% on July 18, the lowest level since October 2021. These numbers, far from optimistic, reveal traders’ reluctance to take risks with ETH options. Even the latest 85% rally failed to instill confidence in professional investors.
Traders expect high volatility in the future
Derivative measurements show that professional traders are not confident in ETH breaking above the $1,900 resistance anytime soon. The possibility of significant fluctuations in the history of unification supports such a thesis. According to Mohit Sarwat:
One thing is certain: investors are waiting for “free” coins after a potential Proof-of-Work fork. The question is whether this flurry of futures relaxation will cause Ether to give up most of its 85% gains over the past 30 days.
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