Ethereum rallies above $1.2K but derivatives metrics show traders fear a collapse
Ethereum rallies above $1.2K but derivatives metrics show traders fear a collapse
#Ethereum #rallies #1.2K #derivatives #metrics #show #traders #fear #collapse Welcome to InNewCL, here is the new story we have for you today:
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Ether (ETH) is up 5.6% on Dec. 20 after testing the $1,150 support the previous day. Still, a bearish trend prevails, forming a three-week descending channel, price action attributed to expectations of further US Federal Reserve rate hikes.
Ether/USD Price Index, 12-hour. Source: TradingView
Jim Bianco, head of institutional research firm Bianco Research, said Dec. 20 that the Fed will tighten the economy in 2023. Later that day, the Bank of Japan hiked interest rates to fight inflation, much later than its counterparts. The unexpected move made analysts more bearish on risky assets, including cryptocurrencies.
Ethereum may have gotten some tailwind after global payments processor Visa proposed a solution to enable automatic funding from Ethereum wallets. Automatic payments for recurring bills aren’t possible for self-custodial wallets, so Visa would rely on smart contracts known as “account abstraction.” Curiously, the concept was created in 2015 with Vitalik Buterin.
The most pressing problem, however, is regulation. On December 19, the US House of Representatives’ Financial Services Committee reintroduced legislation aimed at creating innovation offices within government agencies that deal with financial services. According to North Carolina Representative Patrick McHenry, companies could apply to the offices of agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission for an “enforceable compliance agreement.”
Consequently, investors believe Ether could rebound below $1,000 as the DXY Dollar Index loses strength while US 10-year Treasury yields show higher demand for protection. Trader CryptoCondom expects the next few months to be extremely bearish for the crypto markets.
see algos $DXY Bid down and up crypto. BOJ overnight is not bullish…it is a sign that things are breaking.
DXY ⬇️ & 10Y ⬆️ = recession
I will short the market and wait for a 3 digit number $ETH.
Crypto IS the future of France, but the next 2-3 million will feel like the gulag instead. pic.twitter.com/nLKqtNz3C3
— CryptoCondom (@crypto_condom) December 20, 2022
Let’s look at ether derivatives data to understand if the bearish macroeconomic move has negatively impacted investor sentiment.
The recent bounce above $1,200 has not sparked bullish sentiment
Retailers typically avoid quarterly futures due to their price differential to spot markets. Meanwhile, professional traders prefer these instruments because they prevent fluctuations in funding rates in a perpetual futures contract.
The annualized premium for two-month futures should trade between +4% and +8% in healthy markets to cover the costs and the risks involved. When the futures are trading at a discount to regular spot markets, it shows a lack of confidence from leveraged buyers, which is a bearish indicator.
Ether 2-month futures annualized premium. Source: Laevitas.ch
The chart above shows that derivatives traders continue to use more leverage for short positions (bear positions) as the ether futures premium remains negative. However, the lack of demand from leveraged buyers does not mean that traders expect further negative price action.
For this reason, traders should analyze Ether’s options markets to understand if investors are pricing in higher chances of surprise negative price moves.
Options traders who do not want to offer downside protection
The 25% delta skew is a telling sign that market makers and arbitrage desks are overcharging for upside or downside protection.
In bear markets, options investors give higher chances of price dumping, causing the skew indicator to rise above 10%. On the other hand, bullish markets tend to drive the skew indicator below -10%, which means the bearish put options are discounted.
Ether 60-day options 25% delta skew: Source: Laevitas.ch
The delta skew rose from a scary 14% against the protective put options to the current 20% after December 15th. The move signaled that options traders were even less comfortable with downside risks.
The 60-day delta skew signals that whales and market makers are reluctant to offer downside protection, which seems natural given the three-week descending channel.
In short, both the options and futures markets suggest that professional traders do not trust the recent bounce above $1,200. The current trend favors ether bears as the likelihood of the Fed continuing its balance sheet trimming program appears high, which is destructive for risk markets.
The views, thoughts, and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
