Investors Bullish on ETH Derivatives Amid Declining Price
The price of Ether (ETH) has dropped by 14.7% since reaching its peak at $2,120 on April 16, 2023. However, despite this decline, two derivatives metrics suggest that investors are more bullish than they have been in over a year. This raises the question of whether this recent optimism is a response to Bitcoin (BTC) breaking above $34,000 on Oct. 24.
Potential Approval of Bitcoin ETF
One possible reason for the surge in enthusiasm among investors using ETH derivatives is the anticipation of the approval of a spot Bitcoin exchange-traded fund (ETF) in the United States. Analysts from Bloomberg see the ongoing amendments to the spot Bitcoin ETF proposals as a positive sign of progress and impending approvals. If approved, this development is expected to drive up prices across the entire cryptocurrency market.
Gensler’s Perspective on Spot Bitcoin ETFs
In 2019, U.S. SEC Chair Gery Gensler expressed his view on spot Bitcoin ETFs, calling the SEC’s position at the time “inconsistent.” While multiple spot Bitcoin ETF applications had been denied, futures-based ETF products without physical Bitcoin had been in existence since December 2017.
Dencun Upgrade and Ethereum Optimism
Another factor contributing to the optimism among Ethereum investors using derivatives could be the pricing of the Dencun upgrade scheduled for the first half of 2024. This upgrade aims to enhance data availability for layer-2 rollups and reduce transaction costs. It will also prepare the network for future implementation of sharding as part of Ethereum’s roadmap.
Ethereum co-founder Vitalik Buterin emphasized the gradual migration and potential integration of independent layer-1 projects into Ethereum’s layer-2 solutions. He also highlighted the need to address the high costs associated with rollup fees, especially for non-financial applications.
Challenges Faced by Ethereum Competitors
Ethereum’s competitors are facing challenges as developers realize the costs of maintaining a complete record of a network’s transactions. For example, SnowTrace, a popular blockchain explorer tool for Avalanche (AVAX), recently announced its shutdown due to high costs. Phillip Liu Jr., head of strategy and operations at Ava Labs, pointed out the difficulties users face in self-validating and storing data on single-layer chains.
Other blockchain networks have also experienced issues, such as Theta Network encountering a bug that halted production for several hours and Aptos Network experiencing a five-hour outage. While Ethereum currently faces high fees and processing capacity bottlenecks, it has a track record of continuous upgrades and improvements.
Bullish Sentiment in ETH Derivatives Markets
Despite the decline in ETH’s price, bullish sentiment among ETH traders in the derivatives markets remains strong. The Ether futures premium, which measures the difference between two-month contracts and the spot price, has reached its highest level in over a year. This indicates growing demand for leveraged ETH long positions.
An analysis of Ether options markets reveals further insight. The 25% delta skew in Ether options reached its lowest level in over 12 months on Oct. 27, indicating excessive optimism among traders. This suggests that investors may be anticipating approval for Ether spot ETF instruments or banking on planned upgrades to reduce transaction costs and compete with other blockchain networks.
Hot Take: Bullish Momentum Despite Price Decline
Despite the decline in Ether’s price, investors using ETH derivatives remain bullish. This could be attributed to several factors, including the potential approval of a Bitcoin ETF, upcoming upgrades to the Ethereum network, and challenges faced by Ethereum’s competitors. The strong demand for leveraged ETH long positions and the low delta skew in Ether options indicate optimism among traders. While Ethereum still faces challenges, its continuous upgrades and improvements make it an attractive option for investors.
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