The price of Ether (ETH) has increased 33% in the past five days, and data shows that some buyers were using excessive leverage at this point.
While not necessarily negative, it should be viewed as a yellow flag as a higher premium on futures contracts for short periods of time is normal.
ETH / USD 4-hour chart. Source: TradingView
Although Ether’s upward movement lasted for an extended period of time, it wasn’t until February that Ether broke the psychological barrier of $ 1,500 and entered pricing mode.
In order to assess whether the market is overly optimistic, it is necessary to review some key metrics for derivatives. One of these is the futures premium (also known as the base), which measures the price gap between the futures contract prices and the regular spot market.
The 3 month futures should normally trade at an annualized premium of 6% to 20%, which should be interpreted as a lending rate. By postponing billing, sellers are demanding a higher price, which creates a price difference.
ETH March 26th futures premium. Source: NYDIG-Digital Assets Data
The graphic above shows the Ether Futures premium shoot over 5.5% which is usually not sustainable. Given that it is less than 49 days before the end of March 26, this rate is on an annualized basis of 55%.
A sustainable base of over 20% signals excessive leverage for buyers and creates the potential for massive liquidations and market crashes.
A similar move occurred on January 19 when Ether broke $ 1,400 but failed to maintain such a level. This situation helped trigger the following liquidations, and Ether fell 27% over the next two days.
A base level above 20% is not necessarily a pre-crash alarm, but it does reflect the high leverage effect of futures buyers. This overconfidence from buyers only poses greater risk if the market declines below $ 1,450. This was the price level when the indicator broke 30% and reached alarming levels.
It’s also worth noting that traders sometimes use their leverage during a rally but also buy the underlying asset (ether) to adjust risk.
Sellers were not liquidated by the switch to USD 1,750
Those wagering on $ 2,000 Ether should be happy to know that open interest has risen during the last 33% rally. This situation suggests that short sellers are likely to be fully hedged and taking advantage of the futures premium rather than effectively anticipating a downward trend.
ETH futures aggregate open interest in USD. Source: Bybt.com
This week, open interest in Ether futures hit a record $ 6.5 billion, a monthly increase of 128%.
Professional investors using the strategy described above are essentially doing cash and carry deals, which consist of buying the underlying asset and selling futures contracts at the same time.
These arbitrage positions usually do not involve liquidation risk. Hence, the current rise in open interest during a strong rally is a positive indicator.
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