Ethereum Network's Struggles: A Closer Look at High Fees, Bullish Bets, and ETF Hope
Summary:
The past three weeks have seen a 12.5% drop in Ether's value, attributed in part to the US Federal Reserve's decision not to lower interest rates until March. High transaction fees on Ethereum create intense competition with scalable blockchains like BNB Chain, Solana, and Avalanche. Core developer Tim Beiko's positive announcement regarding Ethereum's network upgrade tests, along with the imminent Dencun hard fork, provide some reassurance. However, investors seem wary due to the drop in Ether's future's premium. Despite the lack of clarity reflected in Ether's neutral option signals, the possible approval of a spot Ether ETF remains a ray of hope for investors.
Over the past three weeks, Ether (ETH) has seen a drop of 12.5% in value, leaving investors with mixed feelings. The plummet can be traced to the global economic outlook, as the financial market plateaued following an unexpected decision by the US Federal Reserve to keep interest rates steady until March. However, this doesn't fully explain the significant plunge in Ether's futures premium to an unprecedented three-month low, leading to speculation about potential additional pressures on the asset's price.
High transaction fees on the Ethereum network have been a constant hindrance for investors and traders. This has instigated high competition with scalable blockchains such as BNB Chain, Solana, and Avalanche. Despite the level of decentralization varying from network to network, layer-1 solutions usually offer a better user experience making Ethereum scalable solutions cost intensive.
Ethereum's core developer, Tim Beiko recently announced encouraging development on Ethereum's network upgrade tests on Feb. 1st. The slated Dencun hard fork is set to introduce proto-danksharding, a potential solution to decrease rollup scalability solution costs. Its activation on the mainnet is anticipated to occur around March, as per analysts, though an official deadline has not yet been disclosed by the Ethereum Foundation.
Highlighting the prominence of layer-2 solutions, the top four networks – Arbitrum, Optimism, Manta, Base – have collectively secured $4.2 billion in total value locked (TVL), overshadowing BNB Chain’s $3.5 billion. Moreover, Ethereum rollups have handled transactions a staggering 4.2 times higher compared to mainnet transactions, as per L2Beat's report compiled over the last week.
Increasingly, professional investors are observing a considerable decline in bullish bets on ETH leverages. With monthly futures contracts lacking funding rates, these instruments are often traded at a 5% to 10% premium to factor in their extended payout periods. Laevitas.ch data illustrates a steady decrease in the ETH futures premium since Jan. 2, while maintaining above a 10% rate until Jan. 23. Interestingly, Ether’s price saw a minimal drop of 2.2% between Jan. 2 and Feb. 2, despite reaching a high of $2,715 on Jan. 12, spurred by FOMO due to the launch of a spot Bitcoin exchange-traded fund (ETF). Generally, the current ETH futures 7% premium can be ascribed to the market's inflated price projections.
Notably, ETH futures last hit a 7% premium on Nov. 4, 2023, when the price of ETH was recorded at $1,860. Historical data shows 110 days trading under the $1,900 resistance, accounting for the market's hesitance back then. However, the daredevils who placed bullish bets in November saw a 21.5% upswing in Ether’s price within the month, from $1,850 to $2,250, indicating that the declining interest in leverage longs may not necessarily portend negative price movements.
Analysis of Ether's option markets may help clarify any confusion about the asset's pricing. A 25% delta skew can be used to assess how the Jan. 11 rejection at $2,600 has affected investor sentiment. Simply put, a skew metric above 7% would indicate a pessimistic outlook, while a -7% skew suggests bullish sentiments.
The Ether options skew was teetering around the bullish -7% threshold on Jan. 31, but quickly reverted to neutral levels. The last time Ether's 25% delta skew remained bullish for more than 24 hours was on Dec. 4, 2023, after the asset's price rallied from $1,560 to $2,250 within seven weeks. Hence, the current neutral options signal reflects not a lack of trust but rather a lack of clarity regarding Ether's potential.
Coincidentally, avid Ether bulls have been eagerly awaiting the possible approval of a spot Ether ETF, a decision that was postponed by the US Securities and Exchange Commission (SEC) on Jan. 24. Based on Bloomberg ETF analyst Eric Balchunas's predictions, an announcement is expected by May 23, with a 70% chance of approval. Combining this with historical trends, Ether’s futures premium's dip to 7% should not be mistaken as a bearish indicator.
This article is for informational purposes and does not constitute investment advice or recommendations. Every investment and trading action involves risk, and the reader should conduct their own analysis before making a decision.
Published At
2/2/2024 11:37:34 PM
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