Ethereum Derivatives Look Bearish, But Traders Think ETH Bottom Is In

Ether (ETH) rose 5.5% in the early hours of November 29, reclaiming critical support at $1,200. However, when looking at a broader timeframe, the negative performance of 24% over the past 30 days has a significant impact on investor sentiment. Additionally, investor sentiment soured after BlockFi filed for bankruptcy on Nov. 28.

News flow remained negative after the US Treasury Department’s Office of Foreign Assets Control (OFAC) announced a settlement with Kraken Exchange for “apparent Iran sanctions violations”. In a Nov. 28 announcement, OFAC said Kraken had agreed to pay more than $362,000 as part of a settlement “to settle its potential civil liability.”

Additionally, on November 28, institutional crypto financial services provider Silvergate Capital denied rumors of a large exposure to the bankruptcy of BlockFi. Silvergate added that its losses were less than $20 million in digital assets and reiterated that BlockFi was not the custodian of its crypto-collateralized loans.

Traders fear that Ether could drop below $800 if the bear market continues, but some are also wondering about the risk of invalidation. An example comes from Twitter crypto trader @CryptoCapo_:

I spent hundreds of hours analyzing the market to come to the conclusion that:

Surrender is a matter of time. $BTC should reach 12k, $ETH 600-700, altcoins should drop 40-50% and shitcoins 50%+.

I will not post here again until confirmed or invalidated.

Good luck!

– crypto cap (@CryptoCapo_) November 28, 2022

Let’s examine Ether derivatives data to understand if deteriorating market conditions have impacted crypto investor sentiment.

Professional traders are slowly breaking out of panic levels

Retail traders generally avoid quarterly futures because of their price difference from spot markets. They are preferred instruments by professional traders because they avoid the fluctuation in funding rates that often occurs in a perpetual futures contract.

The annualized premium for two-month futures should trade between +4% and +8% in healthy markets to cover the associated costs and risks. So when futures are trading at a discount to regular spot markets, it shows a lack of confidence on the part of leveraged buyers – a bearish indicator.

The chart above shows that derivatives traders remain bearish as the Ether futures premium is negative. Nonetheless, he at least showed modest improvement on November 29. Bears can point out how far we are from a neutral to bullish premium of 0% to 4%, but the consequences of a 71% drop in one year carry a lot of weight. .

Nevertheless, traders should also analyze Ether options markets to rule out externalities specific to the futures instrument.

Options traders don’t expect a sudden rally

The 25% delta skew is a telltale sign when market makers and arbitrage desks overcharge for upside or downside protection.

In bear markets, option investors give higher odds for falling prices, causing the bias indicator to rise above 10%. On the other hand, bullish markets tend to push the bias indicator below -10%, which means bearish puts are discounted.

The delta skew declined last week, signaling that options traders are more comfortable offering downside protection.

As the 60-day delta skew rises to 18%, whales and market makers are setting higher prices for Ether. Therefore, the options and futures markets indicate that professional traders fear that a retest of the $1,070 low is the natural path for ETH.

On the optimistic side, data from on-chain analytics firm Glassnode shows that the November 2022 selloff was the fourth largest for Bitcoin (BTC). The move resulted in a 7-day realized loss of $10.2 billion.

Therefore, chances are that the capitulation for Ether holders has passed and those placing bullish bets right now – defying ETH derivatives metrics – will eventually win out.