As the Ethereum futures premium hits a 1-year high, all eyes are on whether the ETH price will mirror this bullish sentiment and soar to new heights.
Ether (ETH) price has seen a decline of 14.7% since reaching its peak at $2,120 on April 16, 2023. Despite this, two derivatives metrics suggest that investors have not been this bullish in over a year. This raises the question of whether this recent optimism is a 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 potential approval of a spot Bitcoin exchange-traded fund (ETF) in the United States. Bloomberg analysts view the ongoing amendments to spot Bitcoin ETF proposals as a positive sign of progress and impending approvals. If approved, 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 at the time, which he deemed inconsistent. While the SEC had denied multiple spot Bitcoin ETF applications, futures-based ETF products that did not involve physical Bitcoin had been in existence since December 2017.
Another factor contributing to the optimism of Ethereum investors using derivatives may be 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. It also prepares the network for the future implementation of sharding as part of the blockchain’s “Surge” roadmap.
Ethereum co-founder Vitalik Buterin highlighted the gradual migration and potential integration of independent layer-1 projects into the Ethereum ecosystem’s layer-2 solutions. However, Buterin also noted that the current costs associated with rollup fees are not acceptable for most users, especially for non-financial applications.
Ethereum competitors are facing challenges as software developers realize the costs of maintaining a complete record of a network’s transactions. For example, SnowTrace, a popular blockchain explorer tool for Avalanche (AVAX), announced its shutdown due to high costs. Phillip Liu Jr., head of strategy and operations at Ava Labs, pointed out the difficulties users face in self-validating and storing data on single-layer chains, often leading to unexpected issues.
Despite the challenges, the Ethereum network has a track record of continuous upgrades and improvements toward addressing high fees and processing capacity bottlenecks.
In the derivatives markets, there is a growing demand for leveraged ETH long positions, as indicated by the surge in the Ether futures contract premium. The options markets also provide insight, with the Ether options 25% delta skew reaching its lowest level in over 12 months. This suggests excessive optimism among traders.
In summary, the reasons behind the bullish sentiment among Ether investors in derivatives markets are not fully clear. It could be due to expectations of Ether spot ETF approval, planned upgrades to reduce transaction costs, or the elimination of the competitive advantage of other blockchain networks.