Ether (ETH) price has been trying to establish an ascending channel since the May 12 market crash that sent its price to $1,790. At the moment, altcoin support is at $2,000, but the high correlation with traditional markets is making traders highly skeptical of the cryptocurrency market recovering.
To date, the Federal Reserve continues to dictate the behavior of the markets and uncertainty has been the prevailing sentiment as the central banks of the major economies are trying to control inflation. Considering that the correlation between the crypto markets and the S&P 500 Index has been above 0.85 since March 29, traders are likely less inclined to bet on Ether decoupling from the broader markets anytime soon.
Currently, the correlation metric ranges from a negative 1, meaning the selected markets are moving in opposite directions, to a positive 1, a perfect, symmetrical move. Meanwhile, zero would show disparity or lack of relationship between the two assets.
The Chairman of the US Federal Reserve, Jerome Powell emphasized on May 17 his decision to lower inflation by raising interest rates until prices begin to fall towards a “healthy level”. Still, Powell warned that the Fed’s tightening move could weigh on the jobless rate.
So, on the one hand, the traditional markets were happy that the monetary authority is planning a “soft landing”, but that does not reduce the unintended consequences of achieving “price stability”.
Regulatory uncertainty also had a negative impact
To further pressure the price of Ether, a document from the United States Congressional Research Service (CRS) analyzing the recent TerraUSD (UST) debacle was published on May 16. The legislative body that supports the United States Congress noted that the stablecoin industry is not “properly regulated.”
At the same time, the total value locked (TVL) of the Ethereum network has fallen by 12% from the previous week.
The TVL of the network dropped from 28.7 billion Ether to the current 25.3 million. The catastrophic scenario caused by the collapse of Terra (LUNA) negatively impacted the decentralized finance industry, an event that was felt throughout the smart contract blockchain. Taking all of this into account, investors should focus on the resilience of the Ethereum network during this unprecedented event.
To understand how professional traders, including whales and market makers, position themselves, let’s look at data from the Ether futures market.
Ether futures show signs of danger
Quarterly futures are the instruments of choice for whales and arbitrage desks due to their absence of a fluctuating funding rate. These fixed-month contracts typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to hold the settlement for longer.
These futures should trade at an annualized premium of between 5% and 12% in healthy markets. This situation is technically defined as “contango” and is not unique to the cryptocurrency markets.
As shown above, the Ether futures contract premium dipped below 5% on April 6, below the market-neutral threshold. Besides, the lack of leverage demand from buyers is evident as the current 3.5% basis indicator remains depressed despite the discounted price of Ether.
Ether’s crash to $1,700 on May 12 exhausted any remaining bullish sentiment and, more importantly, the TVL of the Ethereum network. Although the Ether price is showing an ascending channel formation, the bulls are nowhere near the confidence levels needed to make leveraged bets.
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