Ethereum bounces above $1.2K, but derivatives metrics show traders fear a crash
ether (ETH) gained 5.6% on Dec. 20 after testing support at $1,150 the day before. Still, a bearish trend prevails, forming a three-week long descending channel, a price action attributed to expectations of further rate hikes from the US Federal Reserve.
Jim Bianco, head of the institutional research firm Bianco Research, said on December 20 that the Fed keep the economy tight in 2023. Later that day, Japan’s central bank raised interest rates to combat inflation, much later than its counterparts. The unexpected move made analysts more bearish towards risky assets, including cryptocurrencies.
Ethereum might have caught some tailwind after global payment processor Visa proposed a workaround to allow automatic funding of Ethereum wallets. Automatic recurring bill payments are not possible for self-custody wallets, so Visa would rely on smart contracts, known as “account abstraction.” Interestingly, the concept came up in 2015 with Vitalik Buterin.
However, the most pressing issue is regulation. On December 19, the US House Committee on Financial Services reintroduced legislation aimed at the creation of innovation offices within government agencies dealing with financial services. According to North Carolina Representative Patrick McHenry, companies could apply for an “enforceable compliance agreement” with agency offices like the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Consequently, investors believe that Ether could revise prices below $1,000 as the DXY Dollar Index loses steam, while 10-year US Treasury yields show increased demand for protection. Trader CryptoCondom expects the next few months to be extremely bearish for the crypto markets.
somethings see $DXY down and offer up crypto. The BOJ overnight is not bullish…it is a sign that things are breaking down.
DXY ⬇️ & 10Y ⬆️ = Recession
I’ll be shorting the market hoping triple digits $ETH.
Crypto IS the future of France, but the next 2-3 million will feel like being in the Gulag. pic.twitter.com/nLKqtNz3C3
— CryptoCondom (@crypto_condom) December 20, 2022
Let’s look at ether derivatives data to understand whether the macroeconomic downturn has negatively impacted investor sentiment.
The recent bounce above $1,200 did not inspire optimism
Retail traders often avoid quarterly futures because of the difference in prices from the spot markets. Meanwhile, professional traders prefer these instruments because they avoid fluctuating funding rates on a perpetual futures contract.
Two-month futures annualized premium should trade between +4% and +8% in healthy markets to cover costs and associated risks. When futures are trading at a discount compared to regular spot markets, it shows a lack of confidence from leveraged buyers, which is a bearish indicator.
The chart above shows that derivatives traders continue to use more leverage for short (bearish) positions as the Ether futures premium remains negative. Still, the absence of buyers’ demand for leverage does not mean that traders expect further adverse price action.
For this reason, traders must analyze Ether Options Markets to understand whether investors are pricing in higher probabilities of unexpected adverse price movements.
Options traders are not interested in offering downside protection
The 25% delta bias is a telltale sign when market makers and arbitrage desks are overcharging for upside or downside protection.
In bear markets, option investors give higher odds of a price dump, driving the bias indicator to rise above 10%. On the other hand, bullish markets tend to drive the bias indicator below -10%, which means bearish put options are discounted.
Delta bias increased after December 15 from a fearsome 14% vs. protective puts to the current 20%. The move signaled that options traders became even less comfortable with downside risks.
The bias of the 60-day delta indicates that whales and market makers are reluctant to offer downside protection, which seems natural considering the 3-week-long descending channel.
In a nutshell, both the options and futures markets suggest that professional traders are not confident in the recent bounce above $1,200. The current trend favors Ether bears because the odds of the Fed sticking with its balance sheet reduction program look high, which is destructive to risk markets.
The views, thoughts and opinions expressed here are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.