Market Analysis

Ether’s futures premium has gone through a complete cycle, from April’s extreme euphoria to the present level, which is the most bearish in six months. 

Believe it or not, in both situations, Ether’s (ETH) price was roughly $2,100. This change shows how investors’ mood depends on a few weeks’ performances and holds no relation to longer time frames.

By analyzing the futures markets’ price difference compared against regular spot exchanges, traders can better understand how the price move has impacted professional traders. Typically, the three-month futures trade with an 8% to 15% annualized premium, comparable to the stablecoin lending rate. By postponing settlement, sellers demand a higher price, causing the price difference.

On April 13, the Ether futures premium peaked at 47%, indicating extreme optimism. Ether rallied 36% to a $2,150 all-time high on April 2, and euphoria settled in as it surpassed the $2,200 resistance. At the same time, the net value locked in decentralized finance (DeFi) reached $50 billion, and analysts painted a $10,000 target for year-end.

The bull run was also fueled by EIP-1559 expectations, a proposal that could result in Ether being burned at a rate exceeding the creation of new supply.

On April 17, a 20% crash took place, causing a $1 billion long futures liquidation. That number represented 12.5% of the outstanding contracts, reducing the three-month futures premium to 25%. This optimistic level carried on as Ether recovered the $2,500 mark.

What caused the change in sentiment?

On April 25, Ether began a 100% rally that took the price to $4,170 in just 17 days. One would expect the three-month premium to have soared above 40%, but that did not happen. Somehow, longs were less likely to use excessive leverage compared with the previous month. Traders seemed skeptical of the surprising rally above $3,000 and therefore avoided leveraged longs.

On May 19, as Ether posted a 45% flash crash down to $1,870, the futures premium finally abandoned its optimistic level and moved below 16%. The futures premium remained relatively steady at 17% even as Ether’s price crashed 30% between May 12 and 17. From what the data shows, most traders refused to believe that the trend had reversed and kept opening leveraged long positions despite the $2.8 billion in liquidations.

Ether futures finally completed the entire cycle as the futures premium went below 8% on May 21, marking a bearish sentiment. It is worth noting that this level was unseen since early November 2020.

The chart above shows just how short-sighted traders are, as Ether’s price is 450% above the $380 seen in November 2020. The futures open interest has soared from $1 billion to the current $5.4 billion. Moreover, daily active addresses on the network have risen from 550,000 to 750,000.

As things currently stand, there isn’t a single metric pointing to worsening fundamentals compared with six months ago.

However, investors seem unable to display bullishness due to the recent 56% correction in 12 days. The lesson here is that investors should “zoom out” instead of blindly trusting short-term market indicators and sentiment.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.