Ether ( ETH ) investors may be disappointed due to the 12.5% drop in the past three weeks, but will a deeper look at the asset’s data provide more hope or despair?
Part of the recent correction can be attributed to the macroeconomic scenario, with the market no longer anticipating a decrease in interest rates by the United States Federal Reserve (Fed) by March. Despite this, the Ether futures premium has plunged to the lowest level in 3 months, causing traders to speculate that something else is exerting pressure on ETH’s price.
Ethereum Dencun upgrade could bring back positive price momentum
The Ethereum network's high gas fees are a constant source of discomfort for traders and investors and it creates significant pressure to compete with blockchains focused on scalability, such as BNB Chain, Solana, and Avalanche. Despite variations in decentralization across networks, the user experience for layer-1 solutions is generally more convenient. Therefore, the cost of Ethereum scalability solutions holds great relevance.
On Feb. 1, Ethereum core developer Tim Beiko announced that recent Ethereum network upgrade tests have been successful . The Dencun hard fork will introduce proto-danksharding, which aims to reduce the costs of the rollup scalability solutions. Analysts expect the mainnet to activate by March, although no official deadline has been announced by the Ethereum Foundation.
To highlight the importance of layer-2 solutions, the top four networks - Arbitrum, Optimism, Manta, and Base - hold a combined $4.2 billion in total value locked (TVL), surpassing BNB Chain’s $3.5 billion in smart contract deposits, according to DefiLlama. More significantly, in the past week, Ethereum rollups processed 4.2 times more transactions per day relative to the mainnet, as reported by L2Beat.
The appetite for bullish ETH leverage positions has declined
Professional traders favor monthly futures contracts due to the absence of a funding rate. In neutral markets, these instruments trade at a premium of 5% to 10% to account for their extended settlement period.
Data reveals that the ETH futures premium has been trending down since Jan. 2, but it remained above the 10% threshold until Jan. 23. Interestingly, Ether’s price declined by a modest 2.2% between Jan. 2 and Feb. 2, even though it peaked at $2,715 on Jan. 12 due to the FOMO from the spot Bitcoin exchange-traded fund (ETF) launch. In essence, the current neutral 7% premium on ETH futures can be attributed to exaggerated price expectations in the cryptocurrency markets.
As a point of comparison, the last time Ether’s futures hit 7% was on Nov. 4, 2023, when the ETH price was $1,860. Moreover, historical data shows 110 days of trading below the $1,900 resistance, justifying the lack of confidence back then. However, those who had the courage to place bullish bets in November 2023 saw Ether’s price rally 21.5% from $1,850 to $2,250 within 30 days. Therefore, the lack of excitement in leverage longs does not necessarily imply an impending negative price swing.
Ether option markets reflect a lack of clarity regarding ETH price
To exclude externalities that might have solely impacted the Ether futures, one should analyze options markets. The 25% delta skew can assess whether the rejection at $2,600 on Jan. 11 has made investors less optimistic. In short, if traders expect a drop in Ether’s price, the skew metric will rise above 7%, while periods of excitement typically have a -7% skew.
