Ether (ETH) showed signs of weakness recently, failing to break above the resistance at $1,950 on April 26. As a result, the price dropped to $1,810 on May 1, nearing its lowest level in four weeks. Interestingly, the dip happened at a time when California’s Department of Financial Protection and Innovation closed down the First Republic Bank, one of the major banks in the region.
The Federal Deposit Insurance Corporation (FDIC) entered into a purchase and assumption agreement with JPMorgan to protect FRB depositors, estimating a $13 billion loss. However, UBS analyst Erika Najarian pointed out that this deal does not change the recession and regulatory headwinds that regional banks are facing.
One might have expected that Ether’s price would reflect the banking crisis, but this has not been the case. The VIX indicator, which measures how traders are pricing the risks of extreme price oscillations for the S&P 500 index, reached its lowest level in 18 months on May 1. Overconfidence can often lead to surprise moves and large liquidations in derivatives markets, implying that low volatility does not necessarily precede periods of price stability.
The U.S. economic environment has worsened significantly after reporting its first-quarter gross domestic product (GDP) growth of 1.1%, below the 2% market consensus. At the same time, inflation in Germany remained exceptionally high at 7.6% year-over-year in April. As such, investors are now pricing higher odds of a global recession, with the U.S. Federal Reserve expected to raise interest rates above 5% on May 3.
According to Lyn Alden, a fundamental macro analyst, the U.S. Treasury is targeting $1.4 trillion in new net borrowing between April and September 2023 as tax receipts have been running below expectations. If the U.S. debt level continues to increase while the interest rates remain high, the government will be forced to increase its debt payments, further pressuring its delicate fiscal situation. Such a situation should be positive for scarce assets like cryptocurrencies.
Looking at Ether derivatives metrics, Ether quarterly futures, which are popular among whales and arbitrage desks, typically trade at a slight premium to spot markets, indicating that sellers demand more money to delay settlement for a longer period. Futures contracts on healthy markets should trade at an annualized premium of 5% to 10%, which often leads to a situation known as contango.
Since April 19, the Ether futures premium has been stuck near 2%, indicating that professional traders are unwilling to flip neutral, despite the ETH price testing $1,950 resistance on April 26. However, the absence of demand for leverage longs does not necessarily indicate price decline.
Traders should investigate Ether’s options markets to learn how whales and market makers value the likelihood of future price movements. The 25% delta skew indicates when market makers and arbitrage desks overcharge for upside or downside protection. In bear markets, options traders increase their odds of a price drop, leading to a higher skew indicator above 8%. Bullish markets, on the other hand, tend to drive the skew metric below -8%, indicating that bearish put options are in less demand.
At present, the 25% skew ratio is 1 as protective put options are trading in line with the neutral-to-bullish calls, indicating bullish sentiment, given the six-day 7.8% correction since ETH price failed to break the $1,950 resistance.
Overall, Ethereum’s price has failed to display strength while the banking sector created an opportunity for decentralized financial systems to showcase its transparency and resilience versus traditional markets. However, derivatives metrics show no sign of extreme fear or leveraged bearish bets, indicating low odds of retesting the $1,600 support in the near term. As always, readers should conduct their research and analysis before making any investment decisions.
