Ether (ETH), the native cryptocurrency of the Ethereum network, has experienced a decline of 14.7% since reaching its peak at $2,120 on April 16, 2023. However, despite this downturn, two derivatives metrics indicate that investors have not felt this bullish in over a year. This article aims to analyze the bullish sentiment in the Ether derivatives market, exploring potential factors that may be driving this optimism.
Bullish Response to Bitcoin’s Performance
One possible reason for the surge in enthusiasm among investors using ETH derivatives could be the overall market’s excitement regarding Bitcoin’s recent breakout above $34,000 on Oct. 24. The potential approval of a spot Bitcoin exchange-traded fund (ETF) in the United States may have ignited broader optimism in the cryptocurrency market. Analysts from Bloomberg see ongoing amendments to spot Bitcoin ETF proposals as a positive sign of progress and impending approvals, which could drive the entire cryptocurrency market to higher price levels.
Another factor contributing to the optimism of Ethereum investors using derivatives may be the pricing of the Dencun upgrade scheduled for the first half of 2024. This upgrade aims to enhance data availability for layer-2 rollups, ultimately reducing transaction costs. Additionally, the upgrade will prepare the network for the future implementation of sharding as part of the blockchain’s “Surge” roadmap.
Ethereum co-founder Vitalik Buterin has highlighted the gradual migration and potential integration of independent layer-1 projects into Ethereum ecosystem layer-2 solutions. However, the current costs associated with rollup fees are deemed unacceptable for most users, especially non-financial applications. Ethereum competitors are facing challenges as software developers realize the high costs of maintaining a complete record of a network’s transactions. The shutdown of SnowTrace, a popular blockchain explorer tool for Avalanche (AVAX), allegedly due to high costs, exemplifies this issue.
The Ethereum Network’s Limitations
The Ethereum network currently lacks a solution to its high fees and processing capacity bottlenecks. However, it does have a notable eight-year track record of continuous upgrades and improvements toward resolving these issues, with minimal major disruptions. Nonetheless, the network’s limitations highlight the need for ongoing development to meet the demands of a growing ecosystem.
Examining the bullish sentiment among ETH traders in the derivatives markets is crucial, considering the negative performance of ETH, which has experienced a significant drop of 14.7% since its peak in April. The Ether futures premium, measuring the difference between two-month contracts and the spot price, has reached its highest level in over a year. In a healthy market, the annualized premium, or basis rate, typically falls within the range of 5% to 10%.
The surge in the futures contract premium from 1% on Oct. 23 to 7.4% on Oct. 30 signals a growing demand for leveraged ETH long positions, surpassing the neutral-to-bullish threshold of 5%. This metric increase closely follows a 15.7% rally in ETH’s price over a span of two weeks.
Analyzing the options markets provides further insight. The 25% delta skew in Ether options is a valuable indicator of when arbitrage desks and market makers overcharge for upside or downside protection. A rise above 7% in the skew metric suggests that traders anticipate a drop in Ether’s price. On the other hand, phases of excitement tend to exhibit a negative 7% skew.
On Oct. 27, the Ether options 25% delta skew reached a negative 16% level, the lowest recorded in over 12 months. During this period, protective put (sell) options were trading at a discount, indicating excessive optimism. Furthermore, the current 8% discount for put options presents a complete turnaround from the 7% or higher positive skew that persisted until Oct. 18.
The bullish sentiment among Ether investors in the derivatives markets remains somewhat elusive. While the market may be responding positively to Bitcoin’s potential approval and upcoming Ethereum upgrades, it is challenging to pinpoint the exact drivers behind this optimism. Traders may be anticipating the approval of Ether spot ETF instruments, akin to Bitcoin’s potential approval, or they may be banking on planned upgrades aimed at reducing transaction costs and eliminating the competitive advantage of other blockchain networks. As the cryptocurrency market continues to evolve, monitoring derivatives market sentiment will provide valuable insights into investor behavior and market trends.