Ether futures open interest hits all-time high — Is the ETH bull run starting?

As a seasoned analyst with over two decades of experience in the financial markets, I have witnessed numerous bull and bear cycles. The recent surge in Ether (ETH) prices, reaching levels not seen since July, has piqued my interest.

Ether (ETH) experienced a 15% increase from November 20th to November 27th, approaching the $3,500 mark for the first time in four months. This upward trend occurred alongside a historic high in Ether futures open interest, leading some traders to ponder if the high leverage indicates an overabundance of optimistic feelings among investors.

Over the past 30 days leading up to November 27th, I’ve seen a significant increase of 23% in the aggregate open interest for Ether futures, reaching an impressive $22 billion. For some perspective, three months ago, on August 27th, Bitcoin (BTC) futures open interest was a staggering $31.2 billion. Interestingly enough, when Ether surpassed $4,000 on May 13th, the open interest for ETH futures stood at a more modest $14 billion.

In this market, Binance, Bybit, and OKX are the main players, making up about 60% of the demand for Ethereum futures. On the other hand, the Chicago Mercantile Exchange (CME) is gradually expanding its influence. Importantly, CME currently manages $2.5 billion in open interest for Ethereum futures, indicating a rising institutional interest—a trend typically associated with maturity within the market.

A surge in interest for leveraged investments, be it from large institutions or individual retail investors, doesn’t automatically signal a positive market outlook. The derivatives market is actually well-balanced between buyers and sellers, offering diverse strategies to profit from multiple situations, such as potential price drops.

For example, the cash and carry strategy involves purchasing Ether in the spot (or margin) market while simultaneously selling the same notional amount in ETH futures. Similarly, traders can exploit rate differentials by selling longer-dated contracts, such as those expiring in March 2025, while buying nearer-term contracts like December 2024. These strategies do not reflect bullish sentiment but significantly increase demand for Ether leverage.

As an analyst, I’ve observed an intriguing trend in the Ethereum futures market. Specifically, the annualized premium (or basis rate) on two-month ETH futures surpassed the 10% neutral threshold on November 6 and has remained strong at approximately 17% over the past week. This premium, when employed within the cash and carry strategy, offers traders a fixed return while simultaneously shielding them from market fluctuations.

ETH liquidations could rise due to retail investors

In environments with high levels of debt, the main danger often originates from individual traders, sometimes referred to as “degens,” who commonly employ leverage up to 20 times their initial deposit. If market prices decline by just 5% daily, they can quickly lose all their margin money, causing forced liquidations. For instance, between November 23rd and November 26th, approximately $163 million worth of leveraged long ETH futures positions were forcibly sold off.

To assess the state of Ether retail futures investments, perpetual contracts play a crucial role as they offer valuable insights. Unlike regular monthly contracts, perpetuals tend to closely follow the real-time ETH market price. This is due to their flexible funding rate, which usually falls between 0.5% and 2.1% per month, acting as a mechanism to balance the positions of both long and short traders.

At the moment, the funding rate for ETH perpetual futures hovers around the neutral level at approximately 2.1% per month. Although there was a temporary surge above 4% on November 25th, it did not last long. This indicates that interest among retail investors in leveraged long positions remains relatively low, despite a 15% increase in ETH prices over the past week.

The patterns observed suggest that the increase in Ether open interest is more likely due to institutional tactics like risk management (hedging) or maintaining a balanced position, rather than simply being optimistic or bullish about its price.

This post serves as a source of general knowledge and doesn’t constitute legal or financial guidance. Any perspectives, assumptions, and viewpoints shared in this article belong solely to the author and may not align with those held by CryptoMoon.

2024-11-27 20:56

ETH liquidations could rise due to retail investors

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