Cardano (ADA) has recorded strong growth, with a price increase of 88.8% from November 18 to December 3, reaching a nearly three-year high of 1.33 USD. This increase reflects the overall growth of the altcoin market, peaking at 1.52 trillion USD on December 3, up from 1.16 trillion USD on November 18.
During the 15-day price increase of ADA, the number of leveraged positions using futures contracts reached an all-time high, forcing traders to consider whether the drop to 1.16 USD on December 3 was a buying opportunity and to assess the potential risk of a massive liquidation.
Altcoin Market Capitalization, USD (red) vs. ADA/USD (green) | Source: TradingView
Cardano, along with Stellar (XLM), XRP, Algorand (ALGO), and IOTA, is among the best-performing cryptocurrencies in the top 100 over the 15-day period ending December 3. Some analysts call this increase a "bull run of the dinosaur coins," as these altcoins have experienced at least two previous boom and bust cycles.
What stands out about Cardano, besides its impressive price increase, is the 37% rise in open interest of ADA on derivatives exchanges, surpassing the previous high from October 2022. The total value of leveraged long and short positions reached 932.5 million ADA on December 3, equivalent to 1.2 billion USD.
Open futures contracts for ADA | Source: CoinGlass
In comparison, the total open interest of BNB futures is 1.08 billion USD, even though BNB Chain's market capitalization is double that of Cardano. Additionally, the open interest of altcoins such as Solana (SOL), Dogecoin (DOGE), and Avalanche (AVAX) remains below their previous all-time highs.
ADA futures contracts reflect moderate optimism and low liquidation risk.
The increase in demand for ADA futures contracts should not be viewed as an intrinsic bullish or bearish signal, as these contracts have corresponding positions on the other side of the trade. To assess the sentiment of traders, it is necessary to monitor the monthly futures contract premium, also known as the basis rate. In healthy markets, an annual premium of 5% to 10% is typical.
Annual premium for 3-month ADA futures | Source: Laevitas.ch
Cardano's monthly futures are trading with a healthy premium of 17% over the spot ADA price, consistent with previous bullish markets and not considered unusual. During overly confident periods, long positions can pay up to 60% annually for leverage, a significant cost for long-term positions.
The 8-hour funding fee of ADA perpetual futures | Source: Laevitas.ch
It is also important to consider perpetual contracts. In these cases, exchanges charge fees from long or short positions to balance risk. Since traders tend to be bullish, a monthly fee ranging from 0.5% to 2.1% is often charged from long positions.
The funding rate of ADA perpetual futures peaked at 6% per month on December 2 and 3 but has since dropped to 2.2%. This indicates that traders initially over-leveraged for a short period but then topped up (pumped up) to reduce risk.
Total Value Locked of the Cardano network (TVL) | Source: DefiLlama
Finally, the total value locked (TVL) on the Cardano network should be considered, as the increasing demand for smart contract processing is a key factor driving sustainable ADA demand.
Cardano remains a relatively small player in the decentralized application (DApp) ecosystem, with 685 million USD in deposits. In comparison, Aptos holds 1.23 billion USD in TVL and Avalanche has 1.53 billion USD. Notably, there has been no growth in Cardano's TVL in recent months.
With neutral to optimistic funding rates and futures contract premiums, there are no signs that the increasing demand for ADA futures is the main driver of the price surge. Therefore, there is no immediate risk of massive liquidation.
