3 key Ethereum derivatives metrics suggest $1,600 ETH support lacks strength

The Ether (ETH), price has risen 60% since May 3. It outperforms the leading cryptocurrency Bitcoin (BTC), which has risen 32% in that time. Evidence suggests that the $1,600 support is weakening as smart contract deposit metrics and network usage have weakened. Margin traders are putting increasing pressure on ETH derivatives.

The “Ethereum merger” transition to a Proof-of-Stake (PoS consensus network in September was the main driver of the positive price movement. On July 14, Tim Beiko, a developer from Ethereum core, suggested Sept. 19 for the tentative target date. Analysts expect that the new supply will be cut by as much as 90% following the network’s monetary policy changes. This is a bullish catalyst.

The Terra ecosystem collapse in May has had a huge impact on Ethereum’s total value locked, TVL. Due to Ethereum’s robust security and battle-tested apps, investors shifted their Decentralized Finance (DeFi) deposits over to the Ethereum network. This includes MakerDAO (MKR), the project behind DAI stablecoin.

Market share is the total value that has been locked in. Source: Defi Llama

According to data from Defi Llama, the Ethereum network currently holds a 59% share of TVL. This is up from 51% on May 3. Although Ethereum is growing in share, the $40 billion Ethereum has currently invested on smart contracts seems small compared with the $100 billion that was seen in December 2021.

The current median transfer fees or gas costs of $0.90 indicate that there is less demand for Ethereum-based decentralized applications (DApps). This is a significant drop from May 3, when network transaction costs exceeded $7.50 per annum. However, it is possible to argue that the lower gas fees are due to higher usage of layer-2 solutions like Polygon or Arbitrum.

Options traders are neutral and have left the fear zone

Ether’s derivatives market data can help traders understand the position of whales and market makers. The 25% delta skew, which is indicative of professional traders charging too much for downside or upside protection, is telling.

Investors expect Ether to rise in price. The skew indicator will move to -12% or less if that is the case. This indicates general excitement. A skew higher than 12% indicates a reluctance or unwillingness to adopt bearish strategies. This is typical for bear markets.

Ether 30-day options 25% delta-skew: Source: Laevitas.ch

As a guide, the lower the index, traders are less likely to price downside risk. The skew indicator entered “fear” mode as ETH broke through the $1,300 resistance on July 16. The skew is still below 12%, so option traders are no longer at greater risk of market declines.

Related: Polygon co-founder says that Ethereum will surpass Visa with zkEVM rollups

Margin traders are decreasing bullish bets

One can verify that these movements were not restricted to the options instrument by looking at the margin markets. Investors can leverage their positions to purchase more cryptocurrency by lending. The price of Ether will determine the gains and losses of savvy traders who open margin longs.

Bitfinex margin traders have a reputation for creating position contracts worth 100,000 ETH or more in very short periods of time. This is a sign of large arbitrage desks and whales.

Bitfinex ETH margin longs. Source: Coinglass

The Ether margin longs reached 500,000 ETH on July 2, which is the highest level since November 20,21. Data shows that savvy traders have decreased their bullish bets after the ETH price has recovered some of its losses. There is no evidence that Bitfinex margin traders anticipated the 65% correction in May to sub-$1,000 by mid-June.

Pro traders are less afraid of a crash according to options risk metrics. However, margin market players have been reversing bullish positions while the ETH price tries and establish a $1600 support.

Investors will likely continue to watch the impact of nominal TVL deposits, and demand for smart contract on network gas fees, before placing additional bullish bets.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.


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