Even the most bullish investors will be amazed at Ether’s (ETH) remarkable 85% gain over the past 30 days. It makes the $800 range in mid-July seem a long time ago. Bulls are now aiming to reach $1,900 support. However, derivatives metrics show a different story. The data also suggests that professional traders remain skeptical.
Ether 1-day Price Index, USD. Source: TradingView
Remember that Bitcoin (BTC), the most popular cryptocurrency, gained 28% during the same time period. It is clear that Ether’s bull run was driven primarily by the “Merge”, an expectation of a transition to a Proof-of-Stake (PoS), consensus network.
“Goerli,” the last Ethereum testnet, was scheduled to implement “Merge,” which officially became proof-of-stake (PoS), blockchain on Aug. 11 at 1:45 UTC. The final hurdle was cleared without major setbacks. This gave the green light to transition to the mainnet on Sept. 15-16.
Investors’ high expectations for this landmark transition are justified. This multi-phased upgrade will result in higher scalability, lower fees and a parallel processing mechanism called sharding. The only thing that has changed in “Merge” though is the complete elimination of the cumbersome mining mechanism.
The equivalent inflation will be significantly reduced as miners won’t need to be compensated with newly minted coins. The “Merge”, however, does not address the processing limit or the maximum amount of data that can validated and inserted in each block.
Analyzing derivatives data can help investors understand how confident they are that Ether will sustain the rally and move toward $2,000 or more.
Since August 1, Ether’s futures premium was negative
Because of the price differential from spot markets, retail traders tend to avoid quarterly futures. These are still preferred instruments by professional traders because they avoid the constant fluctuation in contracts’ funding rates.
Fixed-month contracts trade at a premium to spot markets, as investors are willing to withhold more money. This is not a unique situation for crypto markets. Futures should therefore trade at a premium of 4% to 8% annually in healthy markets.
Annualized premium for Ether 3-month futures. Source: Laevitas
The Ether futures premium moved into the negative zone on Aug. 1, which indicates that there is a lot of bearish betting. This is known as backwardation.
Roshun Patel (ex-Vice President at Genesis Trading), posted that Ether futures are in backwardation because of Ethereum “fork odds.” This suggests that traders are taking bearish positions on futures contracts to offset their upside risks.
Ether options market traders need to be able to exclude externalities that are not specific to futures instruments. The 25% delta skew, which is a sign that arbitrage desks and market makers are charging too much for protection against upside or downside risk, can be seen as an example.
Options investors are more likely to be able to pump the market in bullish markets. This causes the skew indicator below -12%. A market’s generalized panic causes a positive skew of 12% or more.
Ether 30-day options 25% delta-skew: Source: Laevitas
On July 18, the 30-day delta skew dropped to -4%, its lowest point since October 2021. These numbers are not optimistic. They show traders’ inability to accept downside risks when using ETH options. Professional investors are not encouraged by the recent rally of 85%.
Traders anticipate full-blown volatility in the future
According to derivatives metrics, pro traders don’t believe ETH will surpass the $1900 resistance soon. This thesis is supported by expectations for volatile movements at the “Merge” date and other indicators. Mohit Sorout says:
This is the most famous crypto play of this year. > Spot $eth buyers > Hedging it with selling Dec futures Expect full blown fuvkery around the merge pic.twitter.com/bu0zBaKZWC
Mohit Sorout (@singhsoro), August 9, 2022
One thing is certain: Investors will expect “free” coins after the proof-of-work fork. It remains to be seen if Ether will lose most of its 85% gains over the past 30 trading days in the rush to unwind futures trades.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.
Eileen Wilson –Technology and Energy
My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.