The price of Ether (ETH) has risen 60% since May 3, outperforming leading cryptocurrency Bitcoin (BTC) by 32% during that period. However, the data suggests that the current $1,600 support lacks strength as network usage and smart contract deposit metrics have weakened. Additionally, ETH derivatives are showing increasing selling pressure from margin traders.
The positive price movement was mainly due to the growing certainty of Ethereum transitioning to a proof-of-stake (PoS) network in September. During the Ethereum core developers conference held on July 14, developer Tim Beiko proposed September 19 as a tentative target date. Additionally, analysts expect new ETH supply to shrink by up to 90% following the network’s monetary policy change, a potential bullish catalyst.
Ethereum’s total value locked (TVL) has benefited greatly from the collapse of the Terra ecosystem in mid-May. Investors moved their decentralized finance protocol (DeFi) deposits to the Ethereum network thanks to its strong security and stable applications, such as MakerDAO (MKR), the project behind the DAI stablecoin.
Currently, the Ethereum network has a market share of 59% of the TVL, up from 51% on May 3, according to data from Defi Llama. Despite gaining share, Ethereum’s current $40 billion of smart contract deposits look small compared to the $100 billion seen in December 2021.
Demand for decentralized application (DApp) use on Ethereum appears to have weakened, considering median transaction fees, or gas fees, currently stand at $0.90. This is a sharp drop from May 3, when network transaction costs exceeded $7.50 on average. Still, it could be argued that the increased use of layer 2 solutions, such as Polygon and Arbitrum, is responsible for the lower gas rates.
Options traders are neutral and out of the “fear” zone
To understand how whales and market makers position themselves, traders should look at data from the Ether derivatives market. In that sense, the 25% slope of the options delta is a telltale sign whenever professional traders charge more for upside or downside protection.
If investors expect the price of Ether to rise, the slope indicator moves to -12% or lower, reflecting widespread enthusiasm. On the other hand, a bias above +12% shows reluctance to adopt bearish strategies, typical of markets in the red.
For reference, the higher the index, the less inclined traders are to price downside risk. As shown above, the tilt indicator broke out of the “fear” zone on July 16 when ETH broke above the $1,300 resistance. Therefore, option traders are no longer more likely to see a market drop as the slope indicator remains below +12%.
Margin traders are reducing their bullish bets
To confirm whether these moves were limited to the specific option instrument, you need to look at the margin markets. Loans allow investors to leverage their positions to buy more cryptocurrencies. When those expert traders go long on margin, their profits (and possible losses) depend on the rise in the price of Ether.
Bitfinex margin traders are known for creating contracts of 100,000 ETH or more in a very short time, indicating the involvement of whales and large arbitrage desks.
Ether margin long positions reached a high of 500,000 ETH on July 2, the highest level since November 2021. However, the data shows that those traders have reduced their bullish bets as the price of ETH recovered part of your losses. The data shows no evidence that Bitfinex margin traders anticipated May’s 65% correction to below $1,000 in mid-June.
Options risk metrics show that professional traders are less fearful of a potential drop, but at the same time, traders in the margin markets have been unwinding bullish positions as ETH price tried to establish $1,600 as support.
Investors will apparently continue to monitor the impact of TVL deposits and smart contract demand on grid gas rates before placing further bullish bets.
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