Since the May 12 market crash, Ether (ETH), has been trying to establish an ascending channel. Its price hit $1,790. The support for the altcoin is currently at $2,000 but traders are skeptical about the cryptocurrency market recovery due to its high correlation with traditional markets.
Bitstamp: 4-hour Ether/USD price Source: TradingView
The Federal Reserve has continued to control the performance of the markets. Uncertainty is the dominant sentiment, as central banks in major economies try to reduce inflation. The correlation between crypto markets, the S&P 500 index and Ethereum has been over 0.85 since March 29th. Traders are less likely to place bets on Ether decoupling from larger markets in the near future.
The correlation metric currently ranges between a 1 to indicate that certain markets move in opposite directions, and a +1, which indicates that there is perfect and symmetrical movement. A 0 would indicate a relationship or disparity between the assets.
Jerome Powell, Chairman of the U.S. Federal Reserve, stressed on May 17 that he is determined to bring down inflation by increasing interest rates until prices fall back toward a healthy level. Powell warned that Fed tightening could have an impact on the unemployment rate.
The traditional markets were happy to hear that the monetary authorities planned a soft landing, but this doesn’t diminish the unintended consequences that will result in price stability.
Also, regulatory uncertainty had a negative effect
A document by the U.S. Congressional Research Service, (CRS), published May 16th and urging Ether to price its currency. It analyzes the TerraUSD (UST) scandal. The U.S. Congress’s legislative support agency noted that the stabilitycoin industry is not adequately regulated.
The Ethereum network’s total value (TVL), has also dropped by 12% compared to the previous week.
Total value of Ethereum network, ETH. Source: Defi Llama
The TVL of the network dropped from 28.7 billion Ether down to 25.3 million. Terra’s (LUNA), collapse had a negative impact on the decentralized finance sector. This was felt all over the smart contract blockchains. Investors should be focusing on the resilience of the Ethereum network during this extraordinary event.
Let’s take a look at Ether’s futures markets data to see how professional traders, whales included, are positioned.
Signs of distress in Ether futures
Because they don’t have a fluctuating funding rate, quarterly futures are favored by arbitrage desks and whales. Fixed-month contracts trade at a slightly higher premium than spot markets. This is because sellers are willing to hold settlement for longer periods of time.
These futures should trade at an annualized premium of 5% to 12 percent in healthy markets. This is technically called “contango”, but it is not only applicable to crypto markets.
Futures Ether: 3-month annualized premium Source: Laevitas
As shown above, Ether’s futures contract premium fell below 5% on April 6. This was below the neutral market threshold. The lack of leverage demand by buyers is also evident in the depressed 3.5% basis indicator, despite Ether being discounted.
The Ether crash to $1700 on May 12 destroyed any remaining bullish sentiment, and, more importantly, the Ethereum network’s TVL. Bulls don’t have the confidence to place leveraged wagers, even though Ether price shows an upward channel formation.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.