Ether (ETH)’s impressive 85% gain over the past 30 days has surprised even the most optimistic investors, and the $800 range seen in mid-July seems far away. The bulls now hope to turn $1,900 into support, but derivative indicators tell a completely different story, and besides, professional traders are still very skeptical, according to the data.
It is important to remember that the main cryptocurrency, bitcoin (BTC), has gained 28% during the same period. There is no doubt then that the rise of Ether was based on the prospect of the Merger, a transition to a proof-of-concept (PoS) network.
Goerli was the final Ethereum test planned for the Merge implementation, which officially became a proof-of-stake blockchain on August 11 at 13:45 UTC. This last hurdle was cleared without major setbacks, giving the green light for the move to the mainnet on September 15th or 16th.
There is a reason why investors have high expectations for this major move. The aim of this multi-stage upgrade is greater scalability and very low overheads through sharding, the parallel processing mechanism. However, the only change brought about by the Merger is the complete elimination of the heavy mining mechanism.
In short, the equivalent inflation will be significantly reduced since miners will no longer need to receive rewards from the newly minted coins. But merging does not address the processing limit, or the amount of data that can be committed and put into each block.
This is why derivatives data analysis is invaluable in understanding investor confidence in Ether’s ongoing rally and progress towards $2,000 or higher.
The ether futures premium has been negative since August 1st
Quarterly futures are generally avoided by retail traders because of their price difference from spot markets. However, they are the preferred instruments of professional traders because they prevent the constant fluctuation of contract financing rates.
These fixed-month contracts typically trade at a small premium to spot markets, as investors demand more cash to maintain a settlement. This situation is not exclusive to cryptocurrency markets. Therefore, futures contracts should trade at a 4-8% annual premium in healthy markets.
The Ether futures premium entered the negative zone on August 1, indicating excessive demand for bearish bets. Usually, this situation is an alarming red flag called “hindsight”.
According to a post by Roshun Patel, former VP of Genesis Trading, Ether futures have reversed due to Ethereum ‘fork chances’, suggesting that traders are compensating for increasing their risks on the spot by taking bearish positions take on futures contracts.
To rule out future-specific externalities, traders should also analyze Ether options markets. For example, the 25% delta asymmetry indicates that market makers and arbitrage desks are overpricing protection up or down.
In bullish markets, option investors give a greater chance of a price increase, which causes the skewness indicator to fall below -12%. On the other hand, widespread panic in a market causes a positive skew of 12% or more.
The 30-day delta skew hit its lowest level at -4% on July 18th, the lowest level since October 2021. Far from bullish, those numbers reflect the reluctance of traders to take downside risk using ETH options . Even the recent 85% rally did not inspire confidence in professional investors.
Traders expect high volatility going forward
Derivatives metrics suggest that professional traders do not believe that ETH can break the $1,900 resistance anytime soon. Furthermore, expectations of significant volatility movements around the date of the Merger support this thesis. According to Mohit Sorout:
Strap in for this year’s hottest crypto drama.
> Spot $eat buyers
> Hedge it to sell Christmas futures
Expect full blown fuvkery around the compound pic.twitter.com/bu0zBaKZWC
— Mohit Sorout (@singhsoro) August 9, 2022
Buckle up for the most famous cryptocurrency game of the year. > Spot Dollar Buyers > They hedge by selling December futures contracts. Expect a real rat race around the Merge pic.twitter.com/bu0zBaKZWC — Mohit Sorout (@singhsoro) August 9, 2022.
One thing is certain: investors expect to receive “free” coins as a result of the proof-of-work fork. The question is whether Ether will lose most of the 85% gains made in the last 30 days due to the frenzy unleashed by these futures trades.
The views and opinions expressed here are solely those of theauthor and those do not necessarily represent Cointelegraph. All investment and trading involves risk. You should do your own research before making a decision.