Ethereum (ETH) price has fallen 14.7% since peaking at $2,120 on April 16, 2023. However, two derivatives indicators suggest investors haven’t felt this bullish in more than a year. This discrepancy is worth investigating to see if the recent optimism is a broader reaction to Bitcoin’s (BTC) move above $34,000 on October 24.
One possible reason for the surge in investor enthusiasm for ETH derivatives is market-wide excitement over the potential approval of a spot Bitcoin exchange-traded fund (ETF) in the United States. Bloomberg analysts say that continued revisions to the spot Bitcoin ETF proposal can be seen as a “good sign” of progress and impending approval. This development is expected to drive the entire cryptocurrency market to higher price levels.
Interestingly, comments made by US SEC Chairman Gery Gensler in 2019 revealed his views. During the 2019 MIT Bitcoin Expo, Gensler called the SEC’s stance at the time “inconsistent” as they rejected multiple applications for spot Bitcoin ETFs and futures-based ETF products that did not involve physical Bitcoin since December 2017. It has existed since months.
Another potential factor for optimism among Ethereum investors using derivatives could be the pricing of the Dencun upgrade, scheduled for the first half of 2024. This upgrade is designed to enhance data availability for Layer 2 aggregation and ultimately reduce transaction costs. In addition, this upgrade will prepare the network for future implementation of sharding (parallel processing) as part of the blockchain “Surge” roadmap.
Ethereum co-founder Vitalik Buterin emphasized in a statement on October 31 that independent first-tier projects are gradually migrating and may be integrated into second-tier solutions in the Ethereum ecosystem. Buterin also noted that the current costs associated with aggregation fees are unacceptable for most users, especially for non-financial applications.
Challenges facing Ethereum competitors
Ethereum rivals are facing challenges as software developers realize the costs associated with maintaining a complete record of transactions on the network. For example, Avalanche’s (AVAX) popular blockchain explorer tool SnowTrace announced it was shutting down, allegedly due to high costs.
Phillip Liu Jr., director of strategy and operations at Ava Labs, pointed out the difficulties faced by users in self-verifying and storing data on a single-layer chain. Therefore, the large amount of processing power required often leads to unexpected problems.
For example, on October 18, the Theta Network team encountered an “edge case error” after a node upgrade, causing blocks on the main chain to be out of production for several hours. Similarly, on October 19, the first-layer blockchain Aptos Network (APT) experienced a 5-hour outage, causing exchange deposits and withdrawals to be suspended.
Essentially, the Ethereum network may not currently offer solutions to its high fees and processing power bottlenecks. Still, it does have an eight-year track record of continuous upgrades and improvements to achieve this goal, with few major disruptions.
Assessing Bullish Sentiment in the ETH Derivatives Market
After assessing the fundamentals surrounding the Ethereum network, it is worth investigating the bullish sentiment among ETH traders in the derivatives market, despite ETH’s underperformance, down 14.7% since its April peak of $2,120.
Ethereum futures contango, which measures the difference between the two-month contract and spot prices, has reached its highest level in more than a year. In a healthy market, annualized premiums or basis rates should typically be in the 5% to 10% range.
The data shows growing demand for leveraged ETH long positions, with futures contract premiums surging from 1% on October 23 to 7.4% on October 30, exceeding the 5% neutral to bullish threshold. The spike in this metric comes after ETH price increased by 15.7% in two weeks.
Analyzing the options market can provide further insights. The 25% delta deviation of Ethereum options is a useful indicator for arbitrage desks and market makers when they are overcharging for upside or downside protection. When traders expect Ethereum prices to fall, the bias indicator rises above 7%. In contrast, the excitement phase tends to exhibit a negative bias of 7%.
Related: 3 Reasons Why Ethereum Price Is Falling Against Bitcoin
Note how the 25% delta deviation of Ethereum options reached a level of negative 16% on October 27, its lowest level in 12 months. During this period, protective put (sell) options were trading at discounts, which is characteristic of over-optimism. Additionally, the current 8% discount on put options completely reverses the positive bias of 7% or higher that persisted prior to October 18th.
All in all, the drivers behind the bullish sentiment among Ethereum investors in the derivatives market remain somewhat elusive. Traders may be expecting an Ethereum spot ETF vehicle to be approved after Bitcoin is approved, or they may be counting on planned upgrades aimed at lowering transaction costs and eliminating other blocks like Solana (SOL) and Tron (TRX) The competitive advantage of chain network.
This article does not contain investment advice or recommendations. Every investment and trading activity involves risks, and readers should do their own research when making decisions.
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