Ethereum Traders Turn Cautious as ETH Price Dips Below $3K

Despite ETH price hitting a multi-month low, derivatives data suggests traders see the correction stabilizing.

Ethereum's price fell below $3,000 for the first time in 50 days on July 5, marking a significant downturn amid a broader cryptocurrency market correction driven largely by Bitcoin's performance. This drop has raised concerns among traders about the potential end of the crypto bull run, despite the anticipated launch of a spot Ethereum exchange-traded fund (ETF) in the United States.

Ether’s Decline Reflects Broader Market Trends

On July 5, the total market capitalization of cryptocurrencies dropped below $2 trillion, a level not seen since February 26. Ether’s 18% decline from $3,450 to $2,815 mirrored a sector-wide 16% fall over three days, driven by worsening sentiment towards cryptocurrencies. Analysts attribute this downturn to increased selling pressure on Bitcoin.

Adding to the market's unease, on July 7, the Mt. Gox bankruptcy estate transferred 47,229 Bitcoin—worth $2.6 billion—to a new address as part of creditor repayments. Some of these Bitcoins were moved to a hot wallet on the Bitbank exchange, raising concerns about the potential $4.5 billion selling pressure on BTC. Moreover, since June 19, the German government has moved 7,583 BTC to exchanges, equating to $415 million, with a total holding of 42,274 BTC valued at over $2 billion. These significant transactions have stirred fear, uncertainty, and doubt (FUD), leading to $936 million in liquidations of leveraged long positions over three days, including $235 million in Ether futures.

Traders are now wary that the anticipated 2024 cryptocurrency bull run may be stalling, especially since this downturn coincided with the S&P 500 index reaching a new high on July 5. The stock market's positive response to the U.S. announcement of a rise in the unemployment rate to 4.1% in June suggests that a weaker economy might prompt central bank interest rate cuts, reducing the appeal of fixed-income investments.

Derivatives Metrics Indicate Cautious Optimism

Despite the favorable scenario for risk-on assets, Ether and other cryptocurrencies have struggled to maintain their bullish momentum. While some market participants believe that the launch of a spot Ethereum ETF in the U.S. could positively impact Ether's price, predicting potential inflows remains uncertain, given the current lack of investor interest. In this environment, Ether traders have adopted a more cautious stance, as reflected in derivatives metrics.

In neutral markets, Ether's monthly futures contracts typically trade at a 5%–10% premium compared to spot markets to account for the longer settlement period. Data indicates that the annualized ETH futures premium dropped to 8% on July 5, down from 11% a week earlier. Although this level is not particularly alarming, it is notable given traders' previous expectations of a positive impact from the upcoming spot Ether ETF launch.

To gauge whether hedging demand has increased following the recent price correction, it's useful to analyze the Ether options market. Typically, if traders anticipate a price drop, the ETH options skew metric will rise above 7%. Conversely, optimism is indicated by a skew lower than -7%.

The Ether options skew has remained relatively stable over the past week at -5%. It last entered bullish territory on June 26, indicating a prevailing neutral sentiment for over a week. On the positive side, there has been no excessive demand for downside protection even as Ether's price fell below $3,000.

Conclusion

Despite a 15% correction, Ether derivatives have shown resilience. This does not necessarily indicate that ETH will quickly recover to the $3,300 support level, but it suggests that professional traders are not anticipating further declines or rushing to hedge against additional price drops.

(Photo Source / Blockonome)