Ethereum Surges 38.5% Amid ETF Anticipation, Derivatives Signal Healthy Market Outlook
Summary:
The price of Ether (ETH) increased by 38.5% over the past month, exceeding $3,100 - a peak not seen since April 2022. This surge is likely due to the anticipation of a spot Ethereum exchange-traded fund in the US. The increasing demand for leverage led Ether's futures open interest to surpass $10 billion, raising concerns among investors. Analysts at JPMorgan predict a 50% chance of an Ether ETF by May. Ethereum's transition to a proof-of-stake model and capital inflow to liquid-staking derivative applications like EigenLayer also contribute to ETH's strength. However, healthy derivative metrics indicate no signs of excessive leverage, suggesting a stable outlook for Ether.
In the past month, the price of Ether (ETH) has surged by 38.5%, exceeding the $3,100 mark, a peak unseen since April 2022. This trend is likely prompted by the expectation of a spot Ethereum exchange-traded fund (ETF) in the US, which awaits approval by the Securities and Exchange Commission (SEC). The burgeoning demand for leverage has led to Ether futures open interest surpassing $10 billion. This rise has created concern among investors, especially given that the previous surge to $11 billion in November 2021 was followed by a drastic correction of 55%. But is there real cause for worry among Ether investors this time round?
Coinglass data highlights the fact that up until Feb. 12, Ether futures open interest hadn't surpassed $8.5 billion in two years. However, in less than two weeks following, this rose to the current $10.6 billion. This demonstrates a significant increase in leverage demand for ETH investments. This metric doesn't, however, provide insight into any disequilibrium between demand for longs (buyers) and shorts (sellers).
Driving ETH's strength are the expectations for a spot Ethereum ETF and observable increases in capital input into liquid-staking derivative applications such as EigenLayer. EigenLayer recently received a $100 million investment from venture capitalist firm Andreessen Horowitz (a16z), pushing the protocol's total value locked (TVL) from $1.8 billion to $8.3 billion within 30 days ending Feb. 26.
Apart from ETF expectations, ETH's price has also benefited from airdrops, which included the successful release of the layer-2 solution token, Starknet (STRK), on Feb. 20. Despite attracting a relatively modest TVL of $160 million, the STRK market capitalization currently stands at $1.4 billion. Additionally, despite a challenging launch in November 2023, the yet-to-be-available layer-2 token from Blast has drawn over $2 billion in deposits.
One way to gauge whether Ether investors remain optimistic after the 38.5% 30-day gains, is to assess the ETH futures premium, or basis rate. Traders often prefer monthly futures contracts with no funding rate, and in balanced markets, these often trade 5% to 10% higher to account for the extended settlement period.
Laevitas data indicates the ETH futures premium has consistently hovered around 15% since Feb. 14. This is typically viewed as a comfortable bullish level, displaying no indicators of excessive leverage. In contrast, the 22% annualized premium recorded on Jan. 3 indicated higher liquidation risk, given the overly positive price sentiment by traders, as reflected by the metric.
To eliminate external factors that may have affected Ether futures, the options markets should also be scrutinized. The 25% delta skew can be evaluated to determine if the recent surge above $3,100 on Feb. 26 has made investors excessively hopeful. Simply put, a skew metric rise above 7% suggests that traders expect a decrease in Ether’s price, while a -7% skew signals periods of enthusiasm.
Laevitas data reveals a balanced pricing between call (buy) and put (sell) options, evidenced by the skew metric sitting at -3%. Moreover, the indicator has maintained neutrality since Feb. 20, suggesting traders' ambivalence about Ether's price staying above $3,000. As such, the derivative metrics are in the green, given that Ether’s price has hit its highest in 14 months, without any signs of extreme leverage on the part of the bulls.
This article does not provide investment advice or recommendations. All investments and trading carry a degree of risk, and readers are advised to do their own thorough research before any decision-making.
Published At
2/26/2024 10:07:55 PM
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