Ethereum futures open interest has climbed to a 19-month peak, yet the value of ETH continues to show signs of weakness. This surge in derivatives activity points to heightened interest but does not necessarily foretell a bullish trend for the cryptocurrency.
Ether (ETH) recently endured a 10% correction from July 31 to August 2, retesting the $3,000 support level for the first time since early July. This downturn significantly outpaced the broader cryptocurrency market, which saw a 6.8% decline over the same timeframe. Despite this, the open interest in Ether futures contracts surged to its highest level in seven months, prompting speculation about a potential rally to $3,600.
Increased interest in Ether futures does not inherently signal a bullish outlook. Open interest measures the demand for leverage, often indicating institutional investors’ activity. However, since buyers and sellers are always matched, an increase in open interest does not necessarily reflect a positive sentiment. Part of Ether’s recent decline can be attributed to the lack of net inflows into newly launched Ether exchange-traded funds (ETFs) in the U.S. While there were inflows into funds like BlackRock’s iShares Ethereum Trust and the Fidelity Ethereum Fund, these were offset by outflows from the pre-existing Grayscale Ethereum Trust.
The drop below $3,000 led to $141 million in leveraged long liquidations within 48 hours, exacerbating the correction. Nonetheless, this did not deter other traders from entering the market, whether they were betting on Ether’s price rising or falling. Consequently, the aggregate open interest in Ether futures increased by 5% over seven days, reaching 4.6 million ETH, the highest level since January 2023.
To gauge if buyers are demanding more leverage, it’s essential to analyze how ETH futures monthly contracts are priced relative to regular spot exchanges. In neutral markets, these derivatives should trade 5% to 10% higher, annualized, to compensate for the longer settlement period. If traders are becoming bearish, this indicator would likely fall below that threshold. Ether monthly futures contracts exhibited modest optimism ahead of the spot ETF launch on July 23, with the futures premium reaching 12%. However, subsequent net outflows from spot ETFs and a broader crypto market correction caused the index to drop to 8% by August 2. This level is neutral but not unusual given the 10% price decline over 24 hours.
Retail demand for ETH leveraged longs has remained stagnant. To assess leverage demand among retail traders in Ether futures, one should examine the perpetual contract (inverse swap) funding rate. Unlike monthly contracts, these instruments closely follow the spot price due to their shorter settlement times. Typically, exchanges adjust risk every eight hours by charging a fee to the side demanding more leverage, meaning either longs or shorts pay the fee. In neutral markets, the eight-hour funding rate ranges from zero to 0.016%, equivalent to 1.3% per month. During periods of heightened optimism, this rate can easily exceed 0.025%, or 2.1% per month.
The Ether eight-hour funding rate has been relatively stable at 0.008%, equivalent to 0.7% per month, well within the neutral range. This has been the norm for the past few days, indicating that retail traders were not heavily relying on excessive leverage before the unexpected price drop to $3,000.
The primary driver for the increase in Ether futures open interest has most likely been the cash-and-carry trade, a neutral arbitrage strategy. Investors sell futures contracts to capture the premium while simultaneously buying the spot or ETF to hedge their risk. Therefore, according to ETH derivatives metrics, there is currently no indication that traders are anticipating a short-term price pump.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
