Ethereum's derivatives show strength despite 10% ETH price drop

Ether futures and options reflect pro traders’ confidence in the bull run.

Ether (ETH) plunged 10% to $3,567 on March 15, marking its lowest point in over a week. This downturn triggered $126 million in forced liquidations within ETH futures. Investors are now questioning whether this signals a shift away from the recent bullish trend and pondering the likelihood of revisiting the $4,090 level observed on March 12. The key to this question may lie in the demand for Ether derivatives.

Traditional financial assets also experienced sell pressure 

Ether’s decline on March 15 mirrored the drops seen in Bitcoin (BTC) and the wider cryptocurrency market, showing no particular underperformance compared to the overall sector. In a similar vein, the S&P 500 index dropped by 1.1% after almost hitting a new all-time high of 5,257 on March 14. Nonetheless, this doesn’t necessarily indicate a corresponding sentiment among ETH investors.

Some experts believe that the movement to take profits is not unique to the crypto markets, highlighted by the U.S. 2-year Treasury yield hitting 4.73% on March 15, its peak in over three months. A rise in yield on fixed incomes suggests selling pressure, as investors seek higher returns on these assets. Therefore, whether cryptocurrencies are viewed as risky investments or scarce alternatives, traders are moving towards cash for security.

The U.S. Federal Reserve (Fed) is set to determine the base interest rate at its next scheduled meeting on March 20. Investors are concerned that recent data on consumer inflation (CPI) and the producer price index, being slightly above expectations, might compel the Fed to maintain interest rates at 5.25% longer than initially thought. This prospect applies downward pressure on the economy and favors fixed-income investments.

Thierry Wizman, a global FX and rates strategist at Macquarie, stated, “I think the other issue here is not just the 2024 and 2025, its the other issues that the Fed is thinking about which includes that the market is too frothy.” As per CNBC, Wizman suggested this could indicate the Fed’s belief in the need for higher long-term interest rates.

Despite the current volatility and uncertainty in global economies, the fact that Ether has risen 57% year-to-date in 2024 should be seen as a strong vote of confidence. However, given the typically short-term outlook of crypto investors, it is crucial to examine the ETH futures and options markets to discern if the bullish momentum has waned following the recent 10% price drop.

Ether derivatives show no signs of stress or trend change

Perpetual contracts, often referred to as inverse swaps, feature an embedded rate that is recalculated every eight hours. A positive funding rate signals a higher demand for leverage from traders holding long positions.

The data shows that ETH funding rates have consistently been above 0.03% per eight-hour period, which translates to 0.6% weekly. Typically, when traders are overly optimistic about a bull market, these rates can surge above 2.1% per week. Thus, it’s clear that traders engaged in perpetual futures did not shift to a bearish stance amidst the March 15 correction.

To assess whether traders were taken by surprise and are now holding long positions at a loss, it’s crucial to analyze the balance between call (buy) and put (sell) options. An increase in the demand for put options usually suggests that traders are preparing for neutral to bearish price movements.

Over the last 10 days, the demand for Ether call options has outpaced that for protective puts by an average margin of 60%. This ratio could be considered neutral, especially since crypto traders tend to lean toward bullish positions. Therefore, there’s no indication that the Ether derivatives market suffered significantly as the ETH price momentarily dropped by 10% on March 15. Based on the current state of Ether futures and options, the bull market appears to be unshaken, with indicators pointing towards continued health.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.