Ethereum’s price nearing $4K, but traders’ too much optimism is a warning sign.

Ethereum price reaches peak since December 2021, but derivatives data indicates excessive optimism.

Can Ether Price Blast Past $4,800 This Cycle?

Ether (ETH) has been on a bullish run lately, with its price surging by 13% in just 7 days, reaching the $3,900 level for the first time since December 2021. With a current market capitalization of $456 billion, Ether is distancing itself from its competitors. However, there is a risk associated with excessive leverage through ETH derivatives that could potentially jeopardize this bullish momentum.

Addressing Criticism and FUD

Many Ether bulls believe that this current bull run could culminate in a new all-time high, similar to what Bitcoin (BTC) experienced on March 5. However, it’s important to consider the criticism and fear, uncertainty, and doubt (FUD) that might limit Ether’s upside potential.

One common criticism is that the Ethereum network is not scalable, but this issue has been partially solved through layer-2 solutions. Additionally, some analysts point to the dependence on the Ethereum Foundation and the lack of regulatory clarity as factors that could hinder Ether’s bullish momentum.

The interpretation of cryptocurrencies that allow holders to stake their position as securities by the U.S. Securities and Exchange Commission (SEC) Chair, Gary Gensler, is another concern. Gensler argues that staking “looks very similar — with some changes of labeling — to lending.” However, the spot Ethereum exchange-traded fund (ETF) decision on May 23 could settle this debate once and for all, with analysts estimating a 50% to 70% chance of approval.

• Insider Trading and Securities Law: A Federal Judge Rules in a Default Judgment
• Experts say Bitcoin would have reached a record high even without ETFs, just at a later time.
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While there is some validity to the criticism regarding centralization, a report from Electric Capital reveals that the number of developers entering the Ethereum ecosystem increased by 16,700 in 2023, nearly four times more than the influx to Solana. This suggests that Ethereum’s development is not concentrated in a specific set of companies.

The Risk of Overconfidence in Ether Derivatives

The greatest short-term risk for Ether’s price comes from traders’ overconfidence in derivative instruments. The aggregate open interest of Ether futures recently reached its all-time high of $13.4 billion on March 6, indicating a significant demand for leverage.

What’s even more concerning is the Ether futures premium, which measures the price of monthly contracts against levels traded on regular spot exchanges. This premium has soared to its highest point in over 18 months.

Ether annualized futures premium versus spot ETH price. Source: Laevitas

The Ether futures premium crossed the 10% neutral threshold on February 12 and recently peaked at 23%, indicating an excessive demand for long positions. While this confidence from professional traders is a positive sign following a 68% increase year-to-date in 2024, it also raises the risk of cascading liquidations due to intraday volatility.

Similarly, retail traders’ demand for bullish leverage positions has surged to its highest levels in over 18 months.

Ether perpetual futures 8-hour funding rate. Source: Laevitas.ch

Perpetual contracts feature an embedded rate that is usually recalculated every eight hours. A positive funding rate indicates an increased demand for leverage longs, and levels exceeding 0.05% (equivalent to 1% per week) suggest overconfidence.

Ethereum Network Metrics and Competitors

The recent bullishness in Ether price could be attributed to the potential approval of a spot ETF. However, it’s important to consider whether the Ethereum network metrics support further price appreciation.

Over the past 30 days, Ethereum decentralized applications (DApps) have experienced a 6% decline in volume and an 11% contraction in the number of active addresses. In contrast, competitors BNB Chain (BNB) and Solana (SOL) have witnessed significant growth in volume, with BNB Chain growing by 52% and Solana by 71%.

Blockchains ranked by 30-day DApp volumes. Source: DappRadar

Ultimately, while the potential approval of a spot ETF could drive Ether’s price higher, the excessive leverage being employed by both retail and professional traders, even 12 weeks ahead of the decision date, raises doubts about the sustainability of a surge above $4,800.

Q&A: Addressing Readers’ Concerns

Q: Can the Ethereum network handle the increasing demand and scale effectively?

A: The Ethereum network has faced scalability issues in the past, but it has made significant progress in addressing these concerns through layer-2 solutions. While there are still some limitations, such as high gas fees during periods of high demand, developers and the Ethereum community are continuously working on improving scalability.

Q: How does the potential classification of staking as a security affect Ether’s price?

A: The interpretation of staking as a security by the SEC could have regulatory implications for Ether and its price. If staking is classified as a security, it could introduce additional compliance requirements and potentially impact market participants’ ability to stake. The spot Ethereum ETF decision on May 23 could provide more clarity on this matter.

Q: Are there any emerging competitors that could challenge Ethereum’s dominance?

A: Competitors like BNB Chain and Solana have gained significant traction in terms of DApp volume and active addresses. While they pose competition to Ethereum, it’s important to note that Ethereum still has a strong developer community and a significant head start in terms of adoption and infrastructure. Ethereum’s network effect and established ecosystem give it a competitive advantage.

Future Outlook and Investment Recommendations

While the current bullish momentum in Ether’s price is notable, caution is warranted due to the risk associated with excessive leverage through derivatives. The approval of a spot ETF could certainly provide a further boost, but it’s crucial to monitor the Ethereum network metrics and the development of competitors.

Investors should keep a close eye on the spot ETF decision on May 23 and the potential impact it may have on regulatory clarity and market sentiment. Building a diversified portfolio that includes both Ethereum and emerging competitors could be a prudent investment strategy.

Ultimately, the long-term success of Ether will depend on its ability to scale effectively, attract developers, and maintain its position as a leading platform for decentralized applications.

References

1. Official: Bitcoin reaches new-time high – Blocking
2. Electric Capital report
3. BNB Chain and Solana’s growth – Blocking
4. Ethereum network valuation – Brian Russ

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