Is it time for a correction after ETH is up 34% in two weeks? On-chain metrics and derivatives data say yes.
Investors tend not to complain about a price rally except when the chart presents strong downside risks. For example, analyzing the current price chart for Ether (ETH) could lead to the conclusion that the ascending channel since March 15 is too aggressive.
Therefore, it is natural for traders to fear that losing support at $3,340 could lead to a retest of the $3,100 level or a 12% correction to $3,000. Of course, this largely depends on how traders position themselves, along with the on-chain metrics of the Ethereum network.
For starters, the total value locked (TVL) of the Ethereum network peaked at ETH 32.8 million on January 23 and has since decreased by 20%. TVL measures the amount of coins deposited in smart contracts, including decentralized finance (DeFi), gaming, NFT markets, social media, collectibles, and high-stakes.
Also, the average transaction fee of the Ethereum network dipped to $8 on March 16, but has recently increased to $15. So whether that reflects less usage of decentralized applications (DApps) or users getting involved needs to be assessed. benefit from layer 2 scaling solutions.
Traders should analyze Ether futures market data to understand how professional traders position themselves. Quarterly contracts are the preferred instruments of whales and market makers because they avoid the fluctuating funding rate of perpetual futures.
The base indicator measures the difference between longer term futures contracts and current cash market levels. The Ether futures annualized premium should range from 5% to 12% to compensate traders for “locking in” money for two to three months until contract expiration.
The current 6% ether futures basis is slightly above the minimum threshold for a neutral market. An annualized futures premium below 5% is considered bearish, while numbers above 12% indicate a bullish trend.
This data tells us that professional traders are far from enthusiastic, but in recent months there was a base rate of 4% or lower, which reflected bearish sentiment. So there has been an improvement, but not enough to cause excessive demand from buyers.
To exclude externalities that could have influenced the derived data, the on-chain data of the Ethereum network must be analyzed. For example, monitoring network usage tells us if the actual use cases support the demand for Ether.
On-chain metrics raise concerns
Measuring the number of active addresses on the network provides a quick and reliable indicator of effective usage. Of course, this metric could be confused with the increasing adoption of Layer 2 solutions, but it works as a starting point.
The current average of 593,260 daily active addresses is a 2% increase from 30 days ago, but nowhere near the 857,520 views in May 2021. The data shows that Ether token transactions show no signs of growth, at least in the primary layer.
Traders should proceed with DApp usage metrics, but avoid focusing exclusively on TVL because that metric is heavily concentrated on lending platforms and decentralized exchanges (DEXs), so measuring the number of active addresses provides a broader view.
Ethereum DApps saw an 11% average monthly decline in active addresses. Overall, the data is disappointing because the smart contract network was specifically designed to host decentralized applications.
By comparison, DApps on the Polygon network gained 12%, while Solana (SOL) saw a 6% increase in users. Unless there is decent growth in Ether transactions and DApp usage, the daily closing support of $3,340 will likely reverse.
The views and opinions expressed herein are solely those of the Author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.
