Ether (ETH) has experienced a 14.7% decline since reaching its peak at $2,120 on April 16, 2023. However, two derivatives metrics suggest that investors are more bullish than ever before. This raises the question of whether the recent optimism is a broader response to Bitcoin (BTC) breaking above $34,000 on October 24.
One possible reason for the surge in enthusiasm among investors using ETH derivatives is the anticipation of the approval of a spot Bitcoin exchange-traded fund (ETF) in the United States. Bloomberg analysts consider the ongoing amendments to the spot Bitcoin ETF proposals as a positive sign of progress and potential approvals. This development is expected to drive the entire cryptocurrency market to higher price levels.
SEC Chair Gery Gensler’s comments in 2019 reveal his perspective on the SEC’s position regarding spot Bitcoin ETFs. During the 2019 MIT Bitcoin Expo, Gensler criticized the SEC for denying multiple spot Bitcoin ETF applications while allowing futures-based ETF products that do not involve physical Bitcoin since December 2017. This suggests that the SEC’s stance on spot Bitcoin ETFs may be changing.
Another factor contributing to the optimism of Ethereum investors using derivatives is the pricing of the Dencun upgrade scheduled for the first half of 2024. This upgrade aims to enhance data availability for layer-2 rollups, leading to reduced transaction costs. Additionally, the upgrade will prepare the network for the future implementation of sharding as part of the blockchain’s “Surge” roadmap.
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Ethereum co-founder Vitalik Buterin has highlighted the gradual migration and potential integration of independent layer-1 projects into the Ethereum ecosystem. He also addressed the high costs associated with rollup fees, which are not acceptable for most users, especially non-financial applications. The Dencun upgrade aims to address these challenges and improve the overall user experience.
While Ethereum continues to make progress, its competitors are facing challenges in terms of transaction costs and processing capacity. For instance, SnowTrace, a blockchain explorer tool for Avalanche (AVAX), announced its shutdown due to high costs. Phillip Liu Jr., head of strategy and operations at Ava Labs, emphasized the difficulties users face in self-validating and storing data on single-layer chains, which often lead to unexpected issues.
To further assess the bullish sentiment in ETH derivatives markets, it is important to analyze the Ether futures premium and options markets. The Ether futures premium, which indicates the difference between two-month contracts and the spot price, has reached its highest level in over a year. This suggests increasing demand for leveraged ETH long positions.
In the options markets, the 25% delta skew in Ether options is a useful indicator of market sentiment. A negative skew indicates excitement and optimism, while a positive skew suggests anticipation of a price drop. The Ether options 25% delta skew reached a negative 16% level on October 27, the lowest in over 12 months. This indicates excessive optimism among traders, with protective put options trading at a discount.
In summary, the reasons behind the bullish sentiment among Ether investors in derivatives markets remain somewhat elusive. It could be a response to the potential approval of a spot Bitcoin ETF, or it could be based on the planned upgrades aimed at reducing transaction costs. Investors may also be considering Ethereum’s track record of continuous upgrades and improvements as a reason for their optimism.
