Key takeaways:
Ether’s correction mirrored broader altcoin trends, with liquidations balanced by stable open interest.
Ether options and perpetual funding data indicate diminished bullish demand, yet no derivatives-driven trigger for the sell-off.
Ether (ETH) experienced a 9.2% drop in under 12 hours following a risk-off sentiment in the crypto market. More than $500 million in forced liquidations from bullish leveraged positions occurred, but buyers emerged around $4,150. Traders are now questioning whether the sell-off was overdone and if there is potential for further declines below $4,000.
Ether’s drop closely followed the broader altcoin market, showing no particular issues with the Ethereum ecosystem. While ETH futures had significantly higher 24-hour liquidations, this was mainly due to increased open interest and the more prevalent use of derivatives like options, rather than indicative of excessive bullish leverage.
On Sunday, total open interest in Ether futures reached $63.7 billion, while SOL (SOL), XRP (XRP), BNB (BNB), and Cardano (ADA) collectively accounted for $32.3 billion, according to CoinGlass data. Notably, Ether futures open interest stayed relatively constant at ETH 14.2 million on Monday compared to the day before, suggesting that the liquidation impact was offset by new leveraged positions.
Ether derivatives did not show signs of excessive bullishness
To determine if Ether traders altered their outlook after the abrupt price drop, assessing the ETH monthly futures premium is helpful. Under normal conditions, these contracts usually trade 5% to 10% above spot markets to account for the longer settlement time. Strong demand for short positions can reduce the premium below that threshold.
Ether’s annualized monthly futures premium fell to its lowest level in three months, indicating weak demand for leveraged longs. The data confirms a lack of confidence among bulls since Saturday, when the ETH premium dipped below the 5% neutral threshold.
ETH perpetual contracts are an effective tool to gauge trader sentiment. Under neutral conditions, the annualized funding rate typically ranges from 6% to 12%.
Ether perpetual futures funding rate briefly fell to -6%, recovering to -1% on Monday. The rate had already gone below the neutral 6% level on Thursday, challenging the notion that cascading liquidations were mainly triggered by excessive bullish leverage.
Institutional demand should generate an ETH rebound
Although a small number of entities may have taken overly optimistic positions, the initial cause of Ether’s weakness remains unclear and seems to have incited panic selling among other cryptocurrency traders.
Ether options serve as another method to evaluate whether professional traders foresaw a crash. Had there been any form of advance positioning, even by a few entities, demand for put (sell) options would have surged compared to call (buy) contracts. Typically, a ratio above 150% favoring puts indicates strong anxiety about a correction.
Related: BitMine holds over 2% of ETH supply, announces $365M offering
On Deribit, the put-to-call Ether options volume remained near 80% from Wednesday to Sunday, consistent with the 30-day average. Overall, ETH derivatives data indicate a waning demand for bullish exposure, but no proof that derivatives markets were the root cause of the decline.
Instead, evidence implies that futures liquidations stemmed from panic selling, temporarily suppressing risk appetite. Nevertheless, this should not be a long-term concern as Ether’s movement aligns with major altcoins. The outlook for ETH returning to $4,600 remains supported by increasing corporate reserves and the rising demand for spot Ether exchange-traded funds (ETFs).
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
