Ether (ETH) price surged to $3,444 on Nov. 12, its highest level since July. This rally followed Bitcoin (BTC), which hit an all-time high of $89,957 before adjusting to $87,000 on Nov. 12. Traders are now questioning whether excessive leverage in Ether futures could increase the risk of further ETH price correction below $3,200.
Ether 8-hour funding rate. Source: Laevitas.ch
Perpetual futures, also known as inverse swaps, carry an embedded fee to balance out excessive leverage demand. When market sentiment is overly bullish, the funding rate becomes positive. However, rates up to 2.1% per month are considered neutral, as cryptocurrency traders tend to be naturally optimistic.
On Nov. 12, Ether’s funding rate spiked to 6.1% per month, the highest level in eight months. Such elevated levels typically don't last long, as the carry cost for long positions (buyers) becomes unsustainable, and bears are incentivized to short (sell) to capture the funding rate. However, during bull runs, the funding rate can remain unusually high for several weeks.
Ether 8-hour funding rate in early 2024. Source: Laevitas.ch
During the first half of March 2024, Ether’s funding rate stayed at or above 2.5% per month. Even though the fees for holding leveraged long (buy) positions peaked at 11% per month, these levels were not prohibitive for traders who maintained their positions for around two weeks. Additionally, traders can explore alternative funding methods.
Monthly Ether futures contracts offer a fixed premium, which is known prior to the purchase, as opposed to the variable funding rate of perpetual contracts. This allows traders to easily switch to this instrument if the funding rate remains elevated. Other alternatives include margin trading, where traders can borrow stablecoins to acquire more Ether on the spot market.
Is the ETH derivatives market overheated?
To assess whether Ether traders have become excessively optimistic, it is also important to analyze the Ether options market. When arbitrage desks and market makers overcharge for downside protection, the 25% delta skew metric typically rises above 6%. Conversely, periods of heightened market excitement often lead to a negative 6% delta skew.
Ether 30-day options skew (put-call) at Deribit. Source: laevitas.ch
Data shows that Ether investors remain neutral, as the skew metric has not dropped below the negative 6% threshold. This suggests that the temporary surge in demand for leveraged Ether futures does not reflect broader market sentiment. If optimism had been more widespread, one could argue that a 6.1% monthly funding rate would present a risk, but this is not the case at present.
However, these derivative metrics could create an ideal scenario for further Ether price appreciation. It is possible that traders were caught off-guard and lacked sufficient resources to increase their positions as Ether’s price rose over the weekend, indicating a temporary leverage imbalance.
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The $513 million in net inflows to Ether spot exchange-traded funds (ETFs) in the United States from Nov. 6 to Nov. 11 reinforces the view of a healthy, strong spot market demand, contrasting with an excessive appetite for derivatives.
In other words, there is no indication of an imminent risk of cascading liquidations if Ether’s price revisits $3,070, which would represent an 11% decline from the $3,444 high on Nov. 12.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.