ETH derivatives data shows that bulls are increasingly unwilling to defend current price levels, creating more downside opportunities.
Ether’s price fell 10.2% between January 8 and 10 and has been trading in a range around $1,500 since then. More importantly, on a broader time frame, Ether is down 52.5% in 12 months, which partly explains why derivatives indicators were somewhat neutral after Ether’s failed attempt to break above $1,700 on February 8.
Currently, investors’ biggest concern is the SEC’s litigation and enforcement actions against cryptocurrency companies, including Kraken’s crackdown on its staking-as-a-service program and PayPal reportedly pausing its stablecoin project due to regulatory concerns.
The SEC’s crackdown on crypto staking is expected to have unintended consequences for decentralized finance, said Jacob Blish, head of business development at Lido DAO. Blish joins a growing number of crypto industry figures calling for greater transparency in crypto regulation.
On the bright side, Ethereum developers announced the pre-launch of the Shanghai upgrade on the Zhejiang testnet. According to a blog post on February 10, the transition is needed to withdraw funds from validators’ staked positions. The Zhejiang testnet, the first of three testnets simulating Shanghai, is expected to go live in March, but the exact date has not yet been announced.
Let’s look at Ether derivatives data to see if the $1,700 price rejection affected crypto investor sentiment.
ETH futures show slowing demand for leveraged longs
Retail traders generally avoid quarterly futures due to the price difference with the spot market. Professional traders prefer these instruments because they protect against the volatility of funding rates in perpetual contracts.
In a healthy market, three-month futures should trade at an annualized premium of 4% to 8% to cover costs and associated risks. However, when futures trade at a discount to the regular spot market, it suggests a lack of confidence among leveraged buyers, a bearish indicator.
Ether 3-month futures annualized premium. Source: Laevitas
The above chart shows that derivatives traders are more bearish as the Ether futures premium is below the 4% threshold. Therefore, bears can celebrate the indicator’s failure to show a modest premium, even as ETH tested $1,700 on February 8.
The lack of leveraged long demand does not necessarily mean an expectation of adverse price action. Therefore, traders should analyze Ether's options market to understand how whales and market makers are pricing in the possibility of future price movements.
A key options risk indicator flirts with bearish sentiment
A 25% delta skew is a clear sign that market makers and arbitrage desks are charging too much for upside or downside protection.
In a bear market, options investors give higher odds of a price crash, causing the skew indicator to rise above 10%. On the other hand, bullish markets tend to push the skew indicator below -10%, meaning there is less demand for bearish put options.
Ether 30-day option 25% delta deviation: Source: Laevitas.ch
On February 14, the Delta Skew approached the bearish 10% level, indicating pressure from professional traders. This is in stark contrast to late January, when the 25% skew index was hovering around 2% - indicating similar upside and downside risks.
Ultimately, both options and futures markets indicate a shift to neutral to bearish sentiment among professional traders, showing moderate discomfort following the rejection at $1,700.
The odds are therefore stacked against Ethereum, as a hostile regulatory environment tends to amplify the adverse effects of FUD — whether or not it directly impacts the adoption and use cases of the Ethereum network.
The views, thoughts and opinions expressed here are my own and this article does not constitute investment advice or recommendations. Every investment and trading move involves risk and readers should conduct their own research when making a decision.