The price of Ether has witnessed a 14.7% decline from its peak at $2,120 on April 16, 2023. Nevertheless, two key derivatives metrics suggest that investor optimism hasn’t been this strong in over a year. This apparent contradiction raises questions about whether the recent positivity is linked to Bitcoin’s surge above $34,000 on October 24.
One possible catalyst for the heightened enthusiasm among ETH derivatives users could be the broader market’s anticipation of the approval of a spot Bitcoin exchange-traded fund (ETF) in the United States. According to Bloomberg analysts, ongoing changes to spot Bitcoin ETF proposals are seen as a positive signal for progress and impending approvals, which is expected to drive the entire cryptocurrency market to higher levels.
Interestingly, comments made by the U.S. SEC Chair, Gery Gensler, back in 2019 shed light on his perspective. During the 2019 MIT Bitcoin Expo, Gensler criticized the SEC’s stance at the time as “inconsistent” since they had denied multiple spot Bitcoin ETF applications, while futures-based ETF products not involving physical Bitcoin had been in existence since December 2017.
Another factor potentially contributing to the optimism among Ethereum investors using derivatives is the upcoming Dencun upgrade scheduled for the first half of 2024. This upgrade is set to improve data availability for layer-2 rollups, ultimately reducing transaction costs and paving the way for the future implementation of sharding (parallel processing) as part of the blockchain’s “Surge” roadmap.
Ethereum co-founder Vitalik Buterin emphasized in his statement on October 31 that independent layer-1 projects are gradually migrating and possibly integrating as Ethereum ecosystem layer-2 solutions. He also noted that the current costs associated with roll-up fees are unacceptable for most users, especially for non-financial applications.
Challenges for Ethereum competitors are also coming to the forefront. Software developers are realizing the high costs associated with maintaining a complete record of a network’s transactions. For instance, SnowTrace, a popular blockchain explorer tool for Avalanche (AVAX), announced its shutdown, citing high costs as the reason.
Phillip Liu Jr., head of strategy and operations at Ava Labs, pointed out the challenges users face in self-validating and storing data on single-layer chains, often leading to unexpected issues due to the substantial processing capacity required.
For example, on October 18, the Theta Network team encountered an “edge case bug” after a node upgrade, leading to a halt in block production on the main chain for several hours. Similarly, layer-1 blockchain Aptos Network (APT) experienced a five-hour outage on October 19, causing disruptions in exchanges’ deposits and withdrawals.
In summary, while the Ethereum network still faces issues related to high fees and processing capacity bottlenecks, it boasts an eight-year track record of continuous upgrades and improvements toward addressing these challenges with minimal major disruptions.
Now, when assessing the bullish sentiment in ETH derivatives markets, it’s important to look into the positive sentiment among ETH traders in the derivatives markets, despite the negative performance of ETH, which has dropped 14.7% since its $2,120 peak in April.
The Ether futures premium, measuring the difference between two-month contracts and the spot price, has reached its highest level in over a year. In a healthy market, the annualized premium, or basis rate, typically falls within the range of 5% to 10%.
This data suggests a growing demand for leveraged ETH long positions, as the futures contract premium surged from 1% on October 23 to 7.4% on October 30, surpassing the neutral-to-bullish threshold of 5%. This increase in the metric follows a 15.7% rally in ETH’s price over two weeks.
An analysis of the options markets provides further insight. The 25% delta skew in Ether options is a useful indicator of when arbitrage desks and market makers overcharge for upside or downside protection. When traders anticipate a drop in Ether’s price, the skew metric rises above 7%. Conversely, phases of excitement tend to exhibit a negative 7% skew.
Notably, the Ether options 25% delta skew reached a negative 16% level on October 27, the lowest in over 12 months. During this period, protective put (sell) options were trading at a discount, indicating excessive optimism. Furthermore, the current 8% discount for put options is a stark shift from the 7% or higher positive skew that persisted until October 18.
In summary, the factors contributing to the bullish sentiment among Ether investors in derivatives markets remain somewhat elusive. Traders may be expecting approval for Ether spot ETF instruments following Bitcoin’s potential approval, or they may be banking on planned upgrades that aim to reduce transaction costs and eliminate the competitive advantage of other blockchain networks like Solana (SOL) and Tron (TRX).