Technical analysis is controversial. However, higher lows are often interpreted as a sign that there is strength. Ether (ETH), although it is 30% lower than its May 12 high of $4,380, the current price at $3,050 is 78% more than the $6,700 low. It is important to understand how retail and professional traders are positioned in derivatives markets to determine if this is a “glass half empty” situation.
Coinbase price in USD for Ether Source: TradingView
Chinese authorities announced new measures to discourage crypto adoption on Sept. 24, causing Sparkpool, the second-largest Ethereum mining site (Sparkpool), to cease operations Monday. Sparkpool claims that the measures were taken to protect users’ assets as a result of “regulatory policies requirements”.
Binance also announced it would stop spot crypto trading and fiat deposits for Singapore-based users, in compliance with local regulatory requirements. Huobi, another Asian spot and derivatives exchange, announced it would close existing accounts based in Mainland China by the end of the year.
Although pro traders remain neutral, fear is beginning to set in
The basis rate, also known as futures premium, is a measure of whether professional traders are bullish. This indicator measures the price gap between futures contracts prices and regular spot market prices.
The preferred instrument of choice for whales and arbitrage desks is the Ether quarterly Futures. It might be difficult for retail traders to trade because of the settlement date and price difference with spot markets. However, their greatest advantage is their lack of fluctuating funding rates.
Ether 3-month basis rate for futures. Source: Laevitas.ch
A 3-month futures contract should be traded with an annualized premium of 5% to 15%, similar to the stablecoin lending rates. Sellers can postpone settlement and demand a higher price. This causes the price difference.
As shown above, Ether’s Sept. 26 dip below $2800 caused the basis rate test the 5% threshold. Albeit re again on Monday.
Inverse swaps are a type of perpetual contract that retail traders choose to use. The fee is charged each 8 hours depending on which side requires more leverage. To understand whether longs are panicking because of recent newsflow, it is necessary to analyze the futures market’s funding rate.
8-hour funding rate for Ether perpetual futures. Source: bybt.com
The funding rate in neutral markets tends to fluctuate between 0% and 0.03% on either side. This is 0.6% per week, which indicates that the longs are paying it.
A moderate increase in the funding rate occurred between Sept. 1 and 7, but it was quickly dissipated by a sudden crypto crash that caused future contracts liquidations to reach $3.54 billion. The indicator has remained flat, with the exception of a few short-lived, slightly negative periods.
The recent $2,800 support test did not affect both professional traders nor retail investors. The situation could change quickly and Ether could fall below the $2,800 price level. This has been happening for 52 days.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.