Record $6.5B futures open interest signals traders are bullish on Ethereum

The open interest on Ethereum futures hit a record $6.5 billion as ETH rallied to $1,750 and traders increased their leverage.

Ether (ETH) price has rallied by 33% over the last five days and data shows that as this occurred some buyers began to use excessive leverage. 

Although this is not necessarily negative, it should be considered a yellow flag as a higher premium on futures contracts for short periods is normal.

ETH/USD 4-hour chart. Source: TradingView

Although Ether’s upward movement has been going for an extended period, it was only in February that Ether finally broke the $1,500 psychological barrier and entered price discovery mode.

To assess whether the market is overly optimistic, there are a few essential derivatives metrics to review. One is the futures premium (also known as basis), and it measures the price gap between futures contract prices and the regular spot market.

The 3-month futures should usually trade with a 6% to 20% annualized premium, which should be interpreted as a lending rate. By postponing settlement, sellers demand a higher price and this creates a price difference.

ETH Mar. 26 futures premium. Source: NYDIG-Digital Assets Data

The above chart shows the Ether futures premium shooting above 5.5%, which is usually unsustainable. Considering there’s less than 49 days to the Mar. 26 expiry this rate is equivalent to a 55% annualized basis.

A sustainable basis above 20% signals excessive leverage from buyers and creating the potential for massive liquidations and market crashes.

A similar movement happened on Jan. 19 as Ether broke $1,400 but failed to sustain such a level. That situation helped trigger the liquidations that followed and Ether plunged 27% over the next two days.

A basis level above 20% is not necessarily a pre-crash alert but it reflects high levels of leverage usage from futures contract buyers. This overconfidence from buyers only poses a greater risk if the market recedes below $1,450. That was the price level when the indicator broke 30% and reached alarming levels.

It is also worth noting that traders sometimes pump up their use of leverage in the midst of a rally but also purchase the underlying asset (Ether) to adjust the risk.

Sellers were not liquidated by the move to $1,750

Those betting on $2,000 Ether should be pleased to know that open interest has been increasing all throughout the recent 33% rally. This situation indicates short-sellers are likely fully hedged, taking benefit of the futures premium, instead of effectively expecting a downside.

ETH futures aggregate open interest in USD terms. Source: Bybt.com

This week the open interest on Ether futures reached a record $6.5 billion, which is a 128% monthly increase.

Professional investors using the strategy described above are essentially doing cash and carry trades which consist of buying the underlying asset and simultaneously selling futures contracts.

These arbitrage positions usually do not present liquidation risks. Therefore, the current surge in open interest during a strong rally is a positive indicator.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Altcoins soar to multi-year highs while Bitcoin price gathers steam

Etheruem’s rally to a new all-time high is being followed by equally impressive performances from the majority of altcoins.

Ether (ETH) led the market higher as it trekked toward another new all-time high at $1,763. ETH CME futures are scheduled to launch on Feb. 9, leading many analysts to predict that the top-ranked altcoin will hit $2,000 before meeting any significant resistance. 

Data from Cointelegraph Markets and TradingView shows Ether currently trades at $1,714, an increase of 3.27% on the 24-hour chart while Bitcoin (BTC) is up 0.21% and trading at $37,633.

ETH/USDT 4-hour chart. Source: TradingView

Gas fees on the Ethereum network also set a new all-time high this week with the average transaction cost reaching $17.5 on Feb. 3, which prompted some exchanges to halt ETH and ERC-20 withdrawals.

Ethereum average gas price. Source: Etherscan

On Feb.4 Yearn Finance (YFI) underwent an exploit which saw a hacker drain $11 million worth of DAI stablecoin from the version 1 DAI yield vault. The team has responded quickly by taking several steps to help mitigate the damage of the attack.

These included Tether freezing $1.7 million in stolen funds which will be returned to the project and a proposal from the MakerDAO community to create a purpose-built collateralized debt position (CDP) to make affected users whole.

Positive news came from Protego, a Washington-based institutional crypto custodian, who announced that it has become the second crypto-native firm to receive national licensing from the U.S. Office of the Comptroller of the Currency.

Democrats vote to push the stimulus bill forward

Stocks rose on Friday as U.S. lawmakers passed a key hurdle in the rollout of the next stimulus package which could see individuals making less than $50,000 per year get a $1,400 stimulus check.

A majority of the major indices finished the day in the green, with the S&P 500, Dow and NASDAQ closing the day up 0.39%, 0.30% and 0.57% respectively. Silver also saw a gain of 2.82% and closed the day at $26.98.

Altcoins push higher

As Bitcoin trades in a range between $36,000 and $38,000, altcoins are gaining momentum and multiple coins saw their prices breakout on Friday.

Daily cryptocurrency market performance. Source: Coin360

MakerDAO (MKR) gained another 45% to establish a new all-time high of $3,099 before correcting to $2,810, while the DeFi infrastructure protocol 0x (ZRX) has seen its price rise 61% to $1.63.

Notable performers from the larger cap altcoins were Cardano (ADA), which is up 26.44%, and Binance Coin (BNB) which reached a new all-time high at $64.87

BTC/USD daily chart. Source: Coin360

The overall cryptocurrency market cap now stands at $1.17 trillion and Bitcoin’s dominance rate is 60.1%.

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3 reasons why Ethereum price is still on track to top $2,000

Substantial spot volume, a favorable futures premium, and top traders buying the dip are all signals that Ethereum price should see continuation.

After dropping 27% over three days, Ether (ETH) price finally reached a bottom at $1,040 on Jan. 22. 

The sharp correction liquidated $600 billion worth of future contracts but interestingly, Ether price rebounded to a new all-time high even as Bitcoin price continues to trade in a slight downtrend.

According to Cointelegraph, the increasing TVL and transaction volumes of the decentralized finance sector are behind Ether’s impressive surge.

ETH/USD 4-hour chart. Source: TradingView

To determine whether the recent pump reflects a potential local top, we’ll take a closer look at on-chain flows and derivatives data.

Exchange withdrawals point to whale accumulation

Increasing withdrawals from exchanges can be caused by multiple factors, including staking, yield farming, and buyers sending coins to cold storage. Usually, a steady flow of net deposits indicate a willingness to sell in the short-term. On the other hand, net withdrawals are generally related to periods of whale accumulation.

ETH held in exchange wallets. Source: Cryptoquant.com

As the above chart shows, on Jan. 23, centralized exchanges recently reached their lowest Ether reserve levels since November 2018.

Although there is some discussion whether part of this Ether exodus is an internal transfer between Bitfinex cold wallets, there has been a clear net withdrawal trend over the past month. Despite these ‘rumors’, the data points towards accumulation.

This data also coincides with the DeFi’s total value locked (TVL) reaching a $26 billion all-time high and signals investors chose to take advantage of the lucrative yield opportunities that exist outside of centralized exchanges.

Futures were overbought

By measuring the expense gap between futures and the regular spot market, a trader can gauge the level of bullishness in the market.

The 3-month futures should usually trade with a 6% to 20% annualized premium (basis) versus regular spot exchanges. Whenever this indicator fades or turns negative, this is an alarming red flag. This situation is known as backwardation and indicates that the market is turning bearish.

On the other hand, a sustainable basis above 20% signals excessive leverage from buyers, creating the potential for massive liquidations and eventual market crashes.

March 2021 ETH futures premium. Source: NYDIG Digital Assets Data

The above chart shows that the premium peaked at 6.5% on Jan. 19, equal to a 38% annualized rate. This level is considered extremely overbought, as traders need an even higher price increase ahead of expiration to profit from it.

Overbought derivatives levels should be considered a yellow flag, although maintaining them for short periods is normal. Traders might momentarily exceed their regular leverage during the rally and later purchase the underlying asset (Ether) to adjust the risk.

One way or another, the market adjusted itself during the Ether price crash, and the futures premium currently stands at a healthy 4.5% level, or 28% annualized.

Spot volume remains strong and traders bought the dip

In addition to monitoring futures contracts, profitable traders also track volume in the spot market. Typically, low volumes indicate a lack of confidence. Therefore significant price increases should be accompanied by robust trading activity.

ETH aggregate spot exchanges volumes. Source: Coinalyze.net

Over the past week, Ether has averaged $6.1 billion in daily volume, and while this figure is far from the $12.3 billion all-time high seen on Jan. 11, it is still 240% higher than December’s. Therefore, the activity supporting the recent $1,477 all-time high is a positive indicator.

Exchange-provided data highlights traders’ long-to-short net positioning. By analyzing every client’s position on the spot, perpetual and futures contracts, one can obtain a clearer view of whether professional traders are leaning bullish or bearish.

With this said, there are occasional discrepancies in the methodologies between different exchanges so viewers should monitor changes instead of absolute figures.

Exchanges top traders ETH long-to-short ratio. Source: Bybt.com

The top traders index at Binance and Huobi have held roughly the same Ether position over the past couple of days. Huobi’s average over the past 30 days has averaged a 0.83 long-to-short ratio while at Binance traders held a 0.94 average. The current reading at 0.85 indicates a slight negative sentiment.

OKEx stands out as the top traders long-to-short ratio peaked at 2.0, strongly favoring longs in the early hours of Jan. 22, but it decreased until Jan. 24 and finally bottomed at 1.05. The strong net selling trend was reverted today as traders bought the dip and the indicator flipped to 1.17 in favor of longs.

One should keep in mind that arbitrage desks and market makers encompass a vast portion of the exchanges’ top traders metric. The unusually high futures premium would incentivize those clients to create short positions in futures contracts while simultaneously buying Ether spot positions.

Considering Ether’s on-chain data indicating whales hoarding, along with the healthy futures contracts premium, the market structure seems reliable.

The fact that top traders at OKEx also bought today’s dip is further indication that the rally should see continuation.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Bitcoin price searches for support near $35K, DeFi tokens move higher

DeFi tokens moved higher while Bitcoin price struggles to hold $35,000 as support.

Bitcoin price is finding soft support at $35,000 after dropping 7.4% in the later hours of Jan. 19.

According to Cointelegraph contributor Joseph Young, the correction was primarily the result of an overheated derivatives market and uncertainty over whether BTC can recapture the $40,000 level. Data from Cointelegraph Markets and TradingView shows that the price of Bitcoin (BTC) fell as low as $33,400 before recovering to the $35,000 level. 

Not all is lost for the top cryptocurrency though, as news BlackRock, a multi-trillion-dollar asset manager, had submitted filings to the U.S. Securities Exchange Commission that mention the possibility of using Bitcoin derivatives and other assets as part of its investment scheme.

BTC/USDT 4-hour chart. Source: TradingView

According to Decentrader analyst filbfilb, Bitcoin could be “trapped in consolidation between $30,000 and $38,000,” with a lot of buy orders currently “stacked between $30,000 and $33,000.”

According to filbfilb’s analysis:

“Demand in the low $30s was tested today and has since bounced with Coinbase leading the price on the drop. The market is fearful in the demand zone as shown by funding.”

The analyst went on to say that a further drop is not expected and a longer consolidation is more likely. Filbfilb also noted that new Tether (USDT) output had recently been on hold but new money was released on Jan. 20 following a request from iFinex Inc for a 30-day extension to produce trial documents for the New York Attorney General.

Daily cryptocurrency market performance. Source: Coin360

Traditional markets respond to President Biden’s inauguration

The traditional markets saw a surge in optimism on Jan. 20 as the U.S. swore in Joseph R. Biden as the 46th President.

The S&P 500, NASDAQ and Dow all finished the trading day off in the green, up 1.39%, 2.31% and 0.83% respectively. The S&P 500 and NASDAQ also reached new all-time highs during the course of the trading day.

BTC/USD daily chart. Source: Coin360

While the majority of cryptocurrencies are posting losses, Polkadot (DOT) resumed its uptrend by rallying 5.04%. The only other top 30 cryptocurrency that posted notable gains is VeChain (VET), which is up 11.47%.

Hedera Hashgraph (HBAR) has also displayied a stand-out performance, surging 44% overnight and currently trading around $0.0984. REN also broke out today, gaining 15.94% in the past 24-hours.

The overall cryptocurrency market cap now stands at $995.5 billion and Bitcoin’s dominance rate is 64.8%.

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Bitcoin bulls buy BTC’s $35K support retest as altcoins push higher

Bitcoin’s lower support retest was bought up by bulls, preparing BTC for another push to $40,000.

Calls for Bitcoin (BTC) to rally above $40,000 were dashed as the top cryptocurrency hit a wall of resistance which sparked a sell-off in the early trading hours. 

Data from Cointelegraph Markets and TradingView show the price of BTC fell as low as $34,368 before rebounding to its current price of $37,300.

Daily cryptocurrency market performance. Source: Coin360

It’s possible that the excitement surrounding the announcement of a $1.9 trillion stimulus bill from the incoming Biden administration quickly morphed into a buy the rumor, sell the news event as questions begin to emerge on the feasibility of parts of the bill.

BTC/USDT 4-hour chart. Source: TradingView

Bitcoin’s dip also comes after renewed criticism from global regulators as European Central Bank President Christine Lagarde recently stated that the top cryptocurrency is “totally reprehensible money laundering activity.” This was followed by an announcement on Jan. 15 that a British financial advisor has petitioned the U.K. Government and Parliament to ban cryptocurrency transactions.

Traditional markets feel the pressure

Tough words from government officials weren’t the sole cause of the downturn in the cryptocurrency market as a scan of the global financial markets shows signs of mounting pressure.

The S&P 500 and NASDAQ faced pressure from the opening bell and finishing the day down 0.72% and 0.73% respectively. The Dow managed to push back against bears to close the day up by 0.3%

A broader survey of the global markets show gold and silver closed down 1.07%, and 3.17%, while oil and the 10-year U.S. Treasury bond lost 2.93% and 3.59%.

Altcoins continue to push higher

BTC/USD daily chart. Source: Coin360

Despite increased sell pressure across the market, several altcoins showed strength. Chainlink (LINK) experienced a surge overnight and currently trades at $20.50, up 13.9% in the 24-hours. Cosmos (ATOM) has gained 21.62% and trades at $7.81.

Meanwhile, Ether (ETH) has faced the same pressures as the broader Bitcoin. At the time of writing the top-altcoin is down 4.8%% and trades for $1,172.

The overall cryptocurrency market cap now stands at $1 trillion and Bitcoin’s dominance rate is 68%.

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