ETH futures market is more likely to be bearish

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Written by

Kevin Lopez
Published on

December 14, 2022

Key points:

  • Ether traded above $1,300, but the rally was largely driven by a 7.1% year-over-year rise in November CPI data, which came in slightly weaker than expected. 
  • Fed will decide on its latest rate hike on Dec. 14, with analysts expecting a slowdown in the pace of hikes after inflation appeared to have peaked.
  • Derivatives traders remain in “fear mode” as the Ether futures contango falls below 0%, suggesting no demand from leveraged buyers. 
  • With a 60-day delta bias of 14%, whales and market makers are reluctant to provide downside protection, which seems odd considering ETH is trading at its highest level in 32 days.
  • Both options and futures markets suggest that professional traders are concerned that resistance at $1,300 ahead of the Fed meeting will not hold.

Ether surged 6.3% to $1,350 on Dec. 13, mimicking a similar failed attempt on Nov. 10. Despite hitting its highest level in 33 days, the gains were not enough to boost traders' sentiment, according to two key derivatives indicators.

ETH/USD price index, 12h. Source - TradingViewETH/USD price index, 12h. Source - TradingView

The bulls’ frustration can be partly explained by Binance facing a near-record $1.1 billion in withdrawals in 24 hours. The unusual behavior comes as the exchange attempts to raise multiple controversies on crypto Twitter over its Proof of Reserves and overall solvency. According to Binance CEO Changpeng Zhao, social media posts are nothing but FUD.

However, Binance’s USD coin reserves were emptied after alleged problems with commercial bank opening hours.

The negative news continued on Dec. 13, when the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Sam Bankman-Fried, the former CEO of now-bankrupt cryptocurrency exchange FTX. The new charges come a day after he was arrested by Bahamian authorities at the request of the U.S. government.

On Dec. 13, the U.S. Commodity Futures Trading Commission (CFTC) also filed a lawsuit against Bankman-Fried, FTX, and Alameda Research, alleging violations of commodity exchange laws. It calls for a jury trial.

Traders breathed a sigh of relief seeing Ether trade above $1,300, but the rally was largely driven by a 7.1% year-over-year rise in November CPI data, which came in slightly weaker than expected. What's more, the Fed will decide on its latest rate hike on Dec. 14, with analysts expecting a slowdown in the pace of hikes after inflation appeared to have peaked.

As such, investors believe that Ethereum could give back its recent gains if comments from Federal Reserve Chairman Jerome Powell take a hawkish stance, as highlighted by trader CryptoAceBTC:

Crypto Ace Tweet

Let's take a look at ether derivatives data to see if the surprise pump had a positive impact on investor sentiment.

Rally to $1,300 has a limited impact on confidence

Retailers typically avoid using quarterly futures because of price differences from the spot market. But professional traders prefer these tools because they protect against fluctuations in funding rates in perpetual futures contracts.

In a healthy market, two-month futures should trade between +4% and +8% annualized premium to cover the costs and risks involved. When futures trade at a discount to the regular spot market, it signals a lack of confidence among leveraged buyers, a bearish indicator.

ETH 2M futures annualized premium. Source - Laevitas.chETH 2M futures annualized premium. Source - Laevitas.ch

The chart above shows that derivatives traders remain in “fear mode” as the Ether futures contango falls below 0%, suggesting no demand from leveraged buyers. However, such data did not signal traders to expect further adverse price action.

For this reason, traders should analyze Ether's options market to see if investors are pricing in a higher probability of unexpected negative price moves.

Options traders on the brink of neutrality

A delta skew of 25% is a clear indication that market makers and arbitrage desks are overcharging for upside or downside protection.

In a bear market, options investors offer a higher chance of price dumping, causing the skewness indicator to rise above 10%. On the other hand, a bullish market tends to push the skew indicator below -10%, which means bearish puts are discounted.

ETH 60D options 25% delta skew. Source - Laevitas.chETH 60D options 25% delta skew. Source - Laevitas.ch

Between December 7th and 11th, the delta bias improved significantly, from a dreadful 16% to a neutral risk-balanced option price of 9.5%. The move suggests options traders are more comfortable with downside risks. However, that changed on Dec. 13 after Ether failed to breach the $1,350 resistance level.

With a 60-day delta bias of 14%, whales and market makers are reluctant to provide downside protection, which seems odd considering ETH is trading at its highest level in 32 days. Both options and futures markets suggest that professional traders are concerned that resistance at $1,300 ahead of the Fed meeting will not hold.

Currently, the odds are high for Ether bears as the bankruptcy of the FTX exchange raises the possibility of tighter regulation and unnerves cryptocurrency investors.


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