Investors Attention! The Ethereum Might Be Losing Ground!
The price of Ethereum (ETH) has risen 60 percent since May 3, and in the process has outstripped the largest cryptocurrency Bitcoin (BTC) with 32 percent. However, TVL shows that the current $1,600 support is lacking in strength as network usage and smart contract deposit metrics weaken. Also, ETH derivatives point to increased selling pressure from margin traders.
The positive price action was primarily driven by the clarification of history for The Merge, Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS) consensus network. During the call at the Ethereum core developers conference on July 14, developer Tim Beiko pointed to September 19 as the tentative target date for The Merge. In addition, market analysts say that they expect the supply of new ETH to drop by as much as 90 percent after the network’s monetary policy change, and this will be a bullish catalyst.
Ethereum’s locked aggregate value (TVL) greatly benefited from Terra’s ecosystem collapse in mid-May. Investors have shifted their decentralized finance (DeFi) deposits to the Ethereum network, thanks to robust and sufficiently well-tested applications, including MakerDAO (MKR), the project behind stablecoin DAI.
Currently, the Ethereum network has increased its market share to 59 percent in TVL, up from 51 percent on May 3, according to data from Defi Llama. Despite increasing its stake in the largest altcoin TVL, its current $40 billion deposits in smart contracts appear to be quite low compared to the $100 billion seen in December of 2021.
Demand for decentralized application (dApp) usage on Ethereum appears to have weakened given the average transfer fees or gas costs, currently $0.90. This marks a drastic drop from May 3, when transaction costs on the network averaged over $7.50. However, it would not be wrong to say that higher usage of Layer 2 solutions such as Polygon and Arbitrum is responsible for lower gas fees.
Options Traders Out of Fear Zone
Traders can look at Ether’s derivatives market data to understand how whales and market makers are positioned. In this sense, the 25 percent delta skew is an important sign when professional traders overcharge to hedge against upside or downside moves. If traders wait for the price of Ether to rise, the skewness indicator moves at -12 percent or lower, reflecting generalized excitement. On the other hand, a skewness above 12 percent indicates reluctance to take bullish strategies typical of bear markets.
For reference, the higher the index, the less inclined traders are to price downside risk. As shown above, on July 16, the skew indicator broke out of “fear” mode when ETH broke above the $1,300 resistance. Therefore, options traders no longer expect a larger drop in ETH as the skew remains below 12 percent.
Margin Traders Abandoning
Margin markets can be analyzed to verify whether these movements are limited to the particular option instrument. Lending allows investors to leverage their position to buy more cryptocurrencies. When traders with this understanding open margin longs, their gains (and potential losses) depend on the rise in the price of Ether.
Bitfinex margin traders are known for creating position contracts of 100,000 ETH or higher in a very short time, which demonstrates the involvement of whales and large arbitrage tables.
Ether margin longs hit 500,000 ETH on July 2, the highest level recorded since November 2021. However, the data shows that traders with this understanding are reducing their bullish bets as they recoup some of their losses in ETH price. The data gives no evidence that margin traders on Bitfinex are expecting a 65 percent correction to below $1,000 from May to mid-June.
Options risk metrics show that professional traders are less afraid of a possible collapse, but at the same time, margin market players are loosening their upside positions as ETH price tries to establish support at $1,600. It seems that investors should continue to monitor their impact on nominal TVL deposits, demand for smart contracts and gas fees on the network before placing additional bullish bets.