Ether (ETH) has surged 60% in price since May 3, outperforming leading cryptocurrency Bitcoin (BTC) by 32%. However, with network usage and smart deposit metrics for his contract weakening, there is evidence that his $1,600 support currently has no strength. Additionally, ETH derivatives show increasing selling pressure from margin traders.
The positive price volatility was largely driven by the increased certainty of merging, the move to Ethereum’s Proof of Stake (PoS) consensus network. During his Ethereum core developer conference on July 14th, developer Tim Beiko suggested his September 19th as a tentative target date for the merge. Additionally, analysts expect new supply of ETH to drop by up to 90% after the network’s monetary policy change, creating a bullish catalyst.
Ethereum’s Total Value Locked (TVL) has benefited greatly from the collapse of Terra’s ecosystem in mid-May. Investors migrated their decentralized finance (DeFi) deposits to the Ethereum network. This is thanks to its robust security and battle-tested applications, including his MakerDAO (MKR), the project behind the DAI stablecoin.
The Ethereum network currently holds 59% market share of TVL, up from 51% on May 3, according to data from Defi Llama. Despite gaining share, his current $40 billion deposit in Ethereum smart contracts looks small compared to his $100 billion seen in December 2021.
Demand for using decentralized applications (DApps) on Ethereum appears to be weakening given the median transfer fee or gas cost currently set at $0.90. This is a steep drop from his May 3rd, when network transaction costs averaged over $7.50. Still, one might argue that the high usage of Layer 2 solutions such as Polygon and Arbitrum is leading to lower gas prices.
Option traders are neutral and exiting the ‘fear’ zone
To understand how whales and market makers are positioned, traders should look at Ether derivatives market data. In that sense, 25% delta skew is a telltale sign whenever a professional trader overcharges for upside or downside protection.
If investors expect the price of Ether to rise, the skew indicator will move below -12%, reflecting generalized excitement. Skew above 12%, on the other hand, indicates a reluctance to adopt a bullish strategy typical of bear markets.
For reference, the higher the index, the less traders care about price downside risk. As you can see above, ETH has broken above his $1,300 resistance and Skew his indicator exited “fear” mode on July 16th. Therefore, with the skew remaining below 12%, these options traders are no longer likely to see a market pullback.
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Margin traders are reducing their bullish bets
To see if these moves are limited to specific options products, we need to analyze the margin market. Lending allows investors to leverage their positions to buy more cryptocurrencies. When these experienced traders open margin longs, their profits (and potential losses) depend on his Ether price appreciation.
Bitfinex margin traders have been known to create position contracts of over 100,000 ETH in a very short amount of time, demonstrating the participation of whales and large arbitrage desks.
Ether Margin Long peaked at 500,000 ETH on July 2nd. This is his highest level since November 2021. However, the data shows that these experienced traders have reduced their bullish bets as the Ethereum price has recovered some of its losses. The data show no evidence that Bitfinex margin traders are expecting a 65% correction below $1,000 in May to mid-June.
Options risk indicators show professional traders are less afraid of a potential crash, but at the same time margin market players are bullish as ETH price tries to establish support at $1,600. I am canceling my position.
Apparently, investors will continue to monitor the impact of nominal TVL deposits and smart contract demand on network gas rates before making additional bullish bets.
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