Ether (ETH) experienced a 10% correction between July 31 and August 2, retesting $3,000 support for the first time since July 8. This move is significantly outpacing the broader cryptocurrency market, which is down 6.8% over the same period. Nevertheless, Ether futures open interest has risen to its highest level in seven months, leading traders to speculate whether a rally to $3,600 is the next possible move.
Increased interest in Ether futures does not necessarily lead to bullishness.
Increased activity in ETH futures contracts typically indicates institutional investor interest, as open positions measure the demand for leverage. However, since buyers (longs) and sellers (shorts) are always matched, an increase in open positions does not necessarily indicate a positive outlook.
Some of the ETH decline may have been due to a lack of net inflows into recently launched ETH exchange-traded funds (ETFs) in the US. In particular, there were inflows into BlackRock’s iShares Ethereum Trust and Fidelity Ethereum Fund, but this was offset by outflows from Grayscale Ethereum Trust, which existed prior to the ETF conversion.
The correction accelerated further as leveraged long liquidations of $141 million occurred within 48 hours as Ether fell below $3,000. However, this did not stop other traders from entering the market, regardless of whether they were betting on a rise or fall in the price of Ether. As a result, total open interest in Ether futures increased by 5% over the seven-day period to 4.6 million ETH, the highest level since January 2023.
To determine if buyers are demanding more leverage, we need to analyze how ETH futures monthly contracts are priced compared to regular spot exchanges. In a neutral market, these derivatives should trade 5% to 10% higher on an annual basis to compensate for the longer settlement period. Therefore, if traders turn bearish, this indicator is likely to fall below that threshold.
Ahead of the launch of the spot ETF on July 23, the Ether monthly futures contract showed a slightly bullish trend, with the futures premium reaching 12%. However, net outflows from the spot ETF and the broader crypto market correction subsequently pushed the index down to 8% on August 2. This level is neutral, but not unusual considering a 10% price drop in 24 hours.
Retail demand for ETH leveraged longs is stagnant.
To assess the leverage demand of retail traders in Ether futures, we need to look at the funding rate of perpetual contracts (reverse swaps). Unlike monthly contracts, these products tend to follow the spot price closely because they have shorter settlement times. Exchanges typically charge a fee to the side that demands more leverage, adjusting risk every 8 hours, meaning that either the long or the short pays a fee.
In a neutral market, the 8-hour funding rate is 0-0.016%, which is equivalent to 1.3% per month. During an optimistic period, this rate can easily exceed 0.025%, or 2.1% per month.
Related: Ethereum’s Solid $2,860 Support Signals a Path to $4,500 – Deribit
The Ether 8-hour funding rate was relatively stable at 0.008%, which is equivalent to 0.7% per month and is within the neutral range. This has been the norm for the past few days and indicates that retail traders were not heavily reliant on excessive leverage prior to the unexpected price drop to $3,000.
The main reason for the increase in open interest in Ether futures is likely to be the neutral arbitrage strategy of cash-and-carry trading. Investors sell futures contracts to capture premium while simultaneously buying spot or ETFs to hedge risk. Therefore, according to Ether derivatives indicators, there is currently no indication that traders are expecting a short-term price pump.
This article does not contain any investment advice or recommendations. All investment and trading moves involve risk, and readers should conduct their own research when making decisions.