The price of Ether (ETH) soared to $3,444 on November 12, hitting its highest level since July. The rally follows Bitcoin (BTC) hitting an all-time high of $89,957 before correcting to $87,000 on November 12. Now, traders are questioning whether excessive leverage in Ether futures could increase the risk of an ETH price correction below $3,200.
Ethereum 8-hour funding rate. Source: Laevitas.ch
Perpetual futures, also known as inverse swaps, have built-in fees to offset excessive leverage demands. When market sentiment is excessively bullish, the funding rate becomes positive. However, cryptocurrency traders tend to be naturally optimistic, so interest rates of up to 2.1% per month are considered neutral.
On November 12, Ethereum’s funding rate soared to 6.1% per month, the highest level in eight months. These elevated levels usually do not last long. This is because holding costs for buyers become unsustainable and bears are incentivized to sell to secure funding rates. However, during a bull market, funding rates can remain unusually high for several weeks.
Ethereum 8-hour funding rate in early 2024. Source: Laevitas.ch
During the first half of March 2024, Ethereum’s funding rate remained above 2.5% per month. Fees for holding leveraged buy positions peaked at 11% per month, but this level was not burdensome for traders who held positions for about two weeks. Traders can also explore alternative financing methods.
Monthly Ethereum futures contracts offer a fixed premium that is known before purchase, unlike the variable funding rates of perpetual contracts. This makes it easy for traders to switch to this product if funding rates remain high. Another alternative is margin trading, where traders can borrow stablecoins to obtain more Ether in the spot market.
Is the ETH derivatives market overheated?
It is also important to analyze the Ether options market to assess whether Ether traders have become overly optimistic. The 25% delta skew indicator typically rises above 6% when arbitrage desks and market makers overcharge for downside protection. Conversely, periods of heightened market excitement often result in negative 6% delta skewness.
Deribit’s Ethereum 30-day options skew (put-call). Source: laevitas.ch
Ether investors remain neutral as the data shows that the distortion indicator has not fallen below the minus 6% threshold. This means that the temporary surge in demand for leveraged Ethereum futures does not reflect broader market sentiment. If optimism were more widespread, one could argue that the 6.1% monthly funding rate could pose risks, but that is not the case at the moment.
However, these derivative indicators could create an ideal scenario for a further rise in the price of Ether. As the price of Ether rose over the weekend, it is possible that traders were caught off guard and lacked sufficient resources to increase their positions, indicating a temporary leverage imbalance.
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Net inflows of $513 million into the U.S. Ethereum Spot Exchange Traded Fund (ETF) from November 6 to November 11 reinforce the view of healthy and strong spot market demand as opposed to an excessive preference for derivatives. do.
That said, there is no indication that a chain liquidation risk is imminent if the price of Ethereum rises again to $3,070, down 11% from its November 12 high of $3,444.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.