Ether (ETH)’s impressive 85% gain over the past 30 days has surprised even the most optimistic investors, making the $800 range seen in mid-July seem like a lifetime ago. The bulls are now hoping to make $1,900 support, but derivatives metrics tell a very different story and data suggests professional traders remain very skeptical.
Ether 1-Day Price Index, USD. Source: TradingView
It’s important to remember that the leading cryptocurrency, Bitcoin (BTC), is up 28% over the same period. Therefore, there should be no doubt that the Ether bull run was driven by merge anticipation, a move towards a Proof-of-Stake (PoS) consensus network.
Goerli was the last remaining Ethereum testnet set to implement the merger, which officially became a proof-of-stake blockchain on August 11 at 1:45 UTC. This final hurdle was cleared without major setbacks, giving the go-ahead for the mainnet transition on September 15 or 16.
There’s a reason investor expectations are booming for this important transition. Such a phased upgrade aims for higher scalability and extremely low fees due to sharding, the parallel processing mechanism. However, the only change in the merge is the complete removal of the pesky mining mechanism.
In short, equivalent inflation is drastically reduced as miners no longer need to be compensated by newly minted coins. Still, the merge does not address the processing limit or the amount of data that can be validated and inserted into each block.
For this reason, analyzing derivatives data is valuable in understanding how confident investors are that Ether will sustain the rally and head towards $2,000 or higher.
Ether futures premium has been negative since August 1st
Retailers typically avoid quarterly futures due to their price differential to spot markets. However, they are the preferred tools of professional traders because they prevent the constant fluctuation of contract funding rates.
These fixed-month contracts typically trade at a slight premium to the spot markets as investors demand more money to withhold settlement. This situation is not exclusive to crypto markets. Consequently, futures should trade at an annualized premium of 4% to 8% in healthy markets.
Ether 3 month futures annualized premium. Source: Laevitas
Ether futures premium entered negative territory on Aug. 1, indicating excessive demand for bearish bets. Usually, this situation is an alarming red flag known as “backward movement.”
According to a post by Roshun Patel, former VP at Genesis Trading, Ether futures have flipped into backwardation due to Ethereum “fork odds,” suggesting traders are doing so Offsetting their upside spot risks by taking bearish positions on futures contracts.
To rule out externalities specific to the futures instrument, traders must also analyze the ether options markets. For example, the 25% delta skew shows when market makers and arbitrage desks overcharge for upside or downside protection.
In bullish markets, options investors give higher chances for a price boost, causing the skew indicator to drop below -12%. On the other hand, the general panic of a market leads to a positive bias of 12% or more.
Ether 30-day options 25% delta skew: Source: Laevitas
The 30-day delta skew hit its lowest level since October 2021 at -4% on July 18. Far from being optimistic, these numbers show traders’ unwillingness to take downside risk with ETH options. Not even the recent 85% rally has inspired confidence among professional investors.
Traders expect full blown volatility
Derivatives metrics suggest that professional traders are not confident of ETH clearing the $1,900 resistance anytime soon. Furthermore, expectations for large volatile moves around the merger date support such a thesis. According to Mohit Sorout:
Buckle up for this year’s most infamous crypto game.
> spot $eth buyer
> Hedging by selling Dec futuresExpect a full blown fuvkery all around the merge pic.twitter.com/bu0zBaKZWC
— Mohit Sorout (@singhsoro) August 9, 2022
One thing is for sure: investors expect “free” coins after the potential proof-of-work fork. The question remains whether the eagerness to unwind these futures trades will result in Ether giving back most of the 85% gains seen over the past 30 days.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You should do your own research when making a decision.