3 key Ethereum derivatives metrics suggest $1,600 ETH support lacks strength

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Ether (ETH) price is up 60% since May 3, out­per­form­ing lead­ing cryp­tocur­ren­cy Bit­coin (BTC) by 32% over that span. How­ev­er, evi­dence sug­gests the cur­rent $1,600 sup­port lacks strength as net­work use and smart con­tract deposit met­rics weak­ened. More­over, ETH deriv­a­tives show increas­ing sell pres­sure from mar­gin traders.

The pos­i­tive price move was pri­mar­i­ly dri­ven by grow­ing cer­tain­ty of the “Ethereum merge” tran­si­tion to a proof-of-stake (PoS) con­sen­sus net­work in Sep­tem­ber. Dur­ing the Ethereum core devel­op­ers con­fer­ence call on July 14, devel­op­er Tim Beiko pro­posed Sept. 19 as the ten­ta­tive tar­get date. In addi­tion, ana­lysts expect the new sup­ply of ETH to be reduced by up to 90% after the net­work’s mon­e­tary pol­i­cy change, thus a bull­ish catalyst.

Ethereum’s total val­ue locked (TVL) has vast­ly ben­e­fit­ed from Ter­ra’s ecosys­tem col­lapse in mid-May. Investors shift­ed their decen­tral­ized finance (DeFi) deposits to the Ethereum net­work thanks to its robust secu­ri­ty and bat­tle-test­ed appli­ca­tions, includ­ing Mak­er­DAO (MKR) — the project behind the DAI stablecoin.

Total val­ue locked by mar­ket share. Source: Defi Llama

Cur­rent­ly, the Ethereum net­work holds a 59% mar­ket share of TVL, up from 51% on May 3, accord­ing to data from Defi Lla­ma. Despite gain­ing share, Ethereum’s cur­rent $40 bil­lion deposits on smart con­tracts seem small com­pared to the $100 bil­lion seen in Decem­ber 2021.

Demand for decen­tral­ized appli­ca­tion (DApp) use on Ethereum seems to have weak­ened, con­sid­er­ing the medi­an trans­fer fees, or gas costs, which cur­rent­ly stand at $0.90. That’s a sharp drop from May 3, when the net­work trans­ac­tion costs sur­passed $7.50 on aver­age. Still, one might argue that high­er use of layer‑2 solu­tions such as Poly­gon and Arbi­trum are respon­si­ble for the low­er gas fees. 

Options traders are neutral, exiting the “fear” zone

To under­stand how whales and mar­ket mak­ers are posi­tioned, traders should look at Ether’s deriv­a­tives mar­ket data. In that sense, the 25% delta skew is a telling sign when­ev­er pro­fes­sion­al traders over­charge for upside or down­side protection.

If investors expect Ether’s price to ral­ly, the skew indi­ca­tor moves to ‑12% or low­er, reflect­ing gen­er­al­ized excite­ment. On the oth­er hand, a skew above 12% shows reluc­tance to take bear­ish strate­gies, typ­i­cal of bear markets.

Ether 30-day options 25% delta skew: Source: Laevitas.ch

For ref­er­ence, the high­er the index, the less inclined traders are to price down­side risk. As dis­played above, the skew indi­ca­tor exit­ed “fear” mode on July 16 as ETH broke above the $1,300 resis­tance. Thus, those option traders no longer have high­er odds of a mar­ket down­turn as the skew remains below 12%. 

Relat­ed: Ethereum will out­pace Visa with zkEVM Rollups, says Poly­gon co-founder

Margin traders are reducing their bullish bets

To con­firm whether these move­ments were con­fined to the spe­cif­ic options instru­ment, one should ana­lyze the mar­gin mar­kets. Lend­ing allows investors to lever­age their posi­tions to buy more cryp­tocur­ren­cy. When those savvy traders open mar­gin longs, their gains (and poten­tial loss­es) depend on Ether’s price increase.

Bitfinex mar­gin traders are known for cre­at­ing posi­tion con­tracts of 100,000 ETH or high­er in a very short time, indi­cat­ing the par­tic­i­pa­tion of whales and large arbi­trage desks.

Bitfinex ETH mar­gin longs. Source: Coinglass

Ether mar­gin longs peaked at 500,000 ETH on July 2, the high­est lev­el since Novem­ber 2021. How­ev­er, data shows those savvy traders have reduced their bull­ish bets as the ETH price recov­ered some of its loss­es. Data shows no evi­dence of Bitfinex mar­gin traders antic­i­pat­ing the 65% cor­rec­tion from May to sub-$1,000 in mid-June.

Options risk met­rics show pro traders are less fear­ful of a poten­tial crash, but at the same time, mar­gin mar­kets play­ers have been unwind­ing bull­ish posi­tions as the ETH price tries to estab­lish a $1,600 support. 

Appar­ent­ly, investors will con­tin­ue to mon­i­tor the impacts of nom­i­nal TVL deposits and demand for smart con­tracts on net­work gas fees before mak­ing addi­tion­al bull­ish bets.

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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