Ether (ETH) price faced a substantial 14% correction on Jan. 3, as the price dropped from $2,380 to $2,050 in less than 2 hours. This price level had not been seen since Dec. 1, 2023 and the unexpected swing led to the liquidation of $100 million worth of ETH long future contracts, which were leveraged bets on the price increase.
Traders are now questioning the significance of this price correction and whether it signals the end of the bullish momentum following three unsuccessful attempts to break above $2,400 in the past month. Coincidentally, this was also the third time that Ether's price dropped below $2,150 during the same period, making it hard to argue that the bullish momentum is over.
The first noteworthy observation from the price chart is the swift recovery to $2,230 on Jan. 3, suggesting that whatever triggered the panic selling and derivatives liquidations has weakened. Some argue that the trigger was a market analysis released on Jan. 3 pointing to the denial of the spot Bitcoin ETF, published by Matrixport. Notably, the digital assets platform Matrixport was co-founded by Jihan Wu, who is known for his highly successful venture in the ASIC miner business at Bitmain.
More importantly, investors are factoring in the latest comments from Eric Balchunas, a senior ETF analyst at Bloomberg. Balchunas stated in an interview with Cointelegraph that approval odds remain at 90%. However, he reiterated that it might take longer for the final decision from the U.S. Securities and Exchange Commission to be reached. In essence, the markets have reacted excessively in both directions: showing excessive confidence in the Jan. 10 deadline and failing to differentiate Matrixport analysts' opinions from actual news and events.
Attorney and commercial litigator Joe Carlasare perfectly encapsulated the situation in a social network post.
I know people are desperate for a narrative, but Bitcoin didn’t sell off because of some silly report about ETF denial.
— Joe Carlasare (@JoeCarlasare) January 3, 2024
It sold off because nothing goes straight up and it’s an easy grab for liquidity to do a long squeeze. In short, the market was overbought.
According to Carlasare, "the market was overbought," indicating that buyers were using excessive leverage, making bulls an easy target for whales and market makers. This conclusion can be drawn from an analysis of the ETH monthly futures annualized premium, which should typically range between 5% and 10% in healthy markets.
The data indicates a growing demand for leveraged ETH long positions, as the futures contract premium surged from 11% on Dec. 18, 2023, to 27% on Jan. 2, 2024. However, sustaining such positions for longer periods became costly for buyers. This surge in the metric followed a 15% rally in ETH's price during that period.
The last time Ether bulls experienced such a significant loss in the futures markets was on August 17, 2023, when $170 million worth of long positions were liquidated. A similar intraday 15% correction occurred, dropping the price from $1,800 to $1,530, but ETH quickly rebounded to $1,680 within two hours. However, the price recovery did not hold in the medium term, as ETH revisited the $1,530 bottom on Sept. 11, 2023.
Related: Matrixport founder says dissemination of Bitcoin ETF report was ‘beyond our control’
To better gauge the exposure of whales and arbitrage desks using derivatives, one must assess Ether options volume. By examining the put (sell) and call (buy) options, we can estimate the prevailing bullish or bearish sentiment.
With the exception of a brief period on Dec. 19, 2023, ETH put options have consistently lagged behind call options in terms of volume, approximately by a factor of two. This suggests reduced demand for protective strategies, reinforcing the confidence and excessive optimism observed in the Ether futures markets.
The cause of the 14% flash crash on Jan. 3 may never be definitively determined. However, judging by Ether derivatives markets, it appears that investors became overconfident and relied heavily on excessive leverage. This does not necessarily invalidate Ether's bull run or make gains above the $2,400 resistance less likely before the ETF decision. Data indicates that the market is healthier, at least from a derivatives perspective.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.