Pro traders fall short as overbought derivatives drive Ethereum’s new high

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Ether (ETH) ‘s performance over the past week has been nothing short of exceptional. The price rose from a low of $ 905 on Jan 11 to a new all-time high of $ 1,440 on Jan 19.

According to Cointelegraph, the main reasons for this move are the growth of Decentralized Financial Protocols (DeFi) as the total locked value reached $ 24 billion, Ethereum’s daily transactions exceeded 1.2 million, and Bitcoin price (BTC) below $ 40,000 Dollar consolidated.

Even so, the final leg of the Ether rally on January 19 showed a different dynamic than the previous breakouts. This time around, a lot of leverage has been used in derivatives and the top traders on the major exchanges have taken short positions.

ETH / USD 4-hour chart. Source: TradingView

Nine days after hitting a multi-year high of $ 1,350, the ether price was corrected 33% so top traders may have opened short positions with the expectation that the same would happen again. It’s also worth noting that a week ago the centralized exchanges recently hit the lowest level of ether reserves since August 2019.

ETH in wallets of the stock exchanges. Source: Cryptoquant.com

Although it is discussed whether part of this Ether exodus is an internal transfer between Bitfinex cold wallets, there has been a clear net payout trend since August 2020. This data is in line with the advent of the DeFi and shows that investors have chosen to take advantage of opportunities for returns outside of centralized exchanges.

The futures premium rose

Professional traders tend to dominate longer-term futures contracts with fixed expiration dates. By measuring the cost gap between futures and the regular spot market, a trader can measure the degree of upward movement in the market.

The 3-month futures should normally trade at an annualized premium (base) of 6% to 20% compared to regular spot exchanges. Anytime that ad fades or goes negative, it’s an alarming red flag. This situation is known as backwardation and it suggests that the market is turning bearish.

On the other hand, a sustainable base of over 20% signals excessive leverage by buyers, which creates the potential for massive liquidations and eventual market crashes.

March 2021 ETH futures premium. Source: NYDIG Digital Assets Data

The above graph shows that the indicator has been between 3.5% and 5.5% over the past four weeks, which corresponds to a moderately bullish annual basis of 19%. The recent high of 6.5% equates to an annualized premium of 29% and is somewhat worrying.

Overbought derivatives should be considered a yellow flag, although it is normal to hold them on for short periods of time. Traders may have temporarily exceeded their regular leverage during the rally, but also bought the underlying asset (ether) to adjust risk. In this case, it will be determined in the next 48 hours whether the Spiking Futures Premium is a red flag or not.

Spot volume peaked but remains strong

Profitable traders not only monitor futures contracts but also keep track of the volume on the spot market. Typically, small amounts indicate a lack of confidence. Therefore, significant price changes should be accompanied by robust trading activity.

ETH aggregates Spot Exchange volumes. Source: Coinalyze.net

This week, Ether hit a daily average volume of $ 4.7 billion, and while that number is far from its all-time high of $ 12.3 billion on Jan. 11, it’s still 160% higher than it was in December . Despite the decline in volume, the resounding trading activity of the recent price spike is a positive indicator.

Top traders decided to sell ether at an all-time high

Data provided by the exchange underscores the long-to-short net positioning of traders. By analyzing the position of each customer on site, perpetual and futures contracts, one can get a clearer view of whether professional traders are bullish or bearish.

Even so, there are occasional discrepancies in methodology between different exchanges so viewers should monitor changes instead of absolute numbers.

Exchanges Top Trader ETH Long-Short Ratio. Source: Bybt.com

In each of the three exchanges analyzed, net short activity has steadily increased over the past 24 hours. That move became even more evident at OKEx when the Top Traders Index took a drastic move from favoring bulls at 1.64 to bias towards bears at 0.91. This indicates that the top traders have net short exposure.

Before jumping to conclusions on whether Ether is bullish or bearish now, it should be remembered that arbitrage desks and market makers comprise a large portion of the exchanges’ top traders. The unusually high futures premium would encourage these customers to create heavy short positions in futures contracts while also buying ether spot positions.

Ether’s derivatives data is a little worrying right now and top traders don’t seem optimistic. These are signals that investors should proceed with caution rather than turning into permabulls just because ether has hit a new all-time high.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.