Ether (ETH) has surged 13% in 7 days, hitting $3,900. Explore the potential for a new all-time high, but excessive leverage poses risks. Analysis of Ether derivatives, regulatory challenges, and network metrics.
Ethereum (ETH) bulls are currently enjoying a strong uptrend as the altcoin's price surged by 13% within the last 7 days, reaching the $3,900 mark for the first time since December 2021. With a market capitalization of $456 billion, Ether has managed to distance itself from its competitors. Nevertheless, there is a looming risk associated with excessive leverage through ETH derivatives that could potentially threaten the current bullish momentum.
Is it possible for Ether to surpass $4,800 in this market cycle?
The optimistic Ether bulls are contemplating the likelihood of the ongoing bull run culminating in a new all-time high, similar to the experience of Bitcoin (BTC) on March 5. However, caution is advised due to the risk of forced liquidations resulting from excessive optimism. To evaluate the feasibility of a $4,800 target price for this market cycle, it is essential to address the criticisms and fear, uncertainty, and doubt (FUD) that might impose limitations on Ether's upside potential.
Aside from the common concern about the scalability of the Ethereum network, partially addressed through layer-2 solutions, some analysts point to dependencies on the Ethereum Foundation and a lack of regulatory clarity as factors hindering Ether's bullish momentum.
SEC Chair Gary Gensler suggests that cryptocurrencies allowing holders to stake their position could be seen as securities, resembling lending with a change in labeling. The upcoming decision on the spot Ethereum exchange-traded fund (ETF) on May 23 could potentially settle this debate, with analysts estimating a 50% to 70% chance of approval.
Despite valid centralization criticisms, a report from Electric Capital highlights a significant increase of 16,700 developers entering the Ethereum ecosystem in 2023, almost four times more than the 4,705 influx to Solana. This challenges the notion that Ethereum's development is concentrated within specific companies.
Risks posed by Ether derivatives and signs of overconfidence
The primary short-term risk to Ether's price stems from overconfidence among traders using derivative instruments. The aggregate open interest of Ether futures reached an all-time high on March 6, hitting $13.4 billion, indicating substantial demand for leverage.
More concerning is the Ether futures premium, reaching its highest point in over 18 months by measuring monthly contract prices against levels traded on regular spot exchanges.
This premium surpassed the 10% neutral threshold on Feb. 12 and peaked at 23%, signaling excessive demand for long positions. While this showcases confidence from professional traders, it also elevates the risk of cascading liquidations due to intraday volatility.
Additionally, the demand for bullish leverage positions from retail traders has surged to its highest levels in over 18 months.
Perpetual contracts with a positive funding rate exceeding 0.05%, equivalent to 1% per week, indicate overconfidence and heightened demand for leverage longs.
However, these risks wouldn't be problematic if Ethereum network metrics indicated strength. Unfortunately, the latest data does not support further Ether price appreciation.
Over the past 30 days, Ethereum decentralized applications (DApps) 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) witnessed a 52% and 71% growth in volume, respectively.
In conclusion, while the recent bullish trend in Ether's price may be attributed to the potential approval of a spot ETF, the excessive leverage from both retail and professional traders, more than 12 weeks ahead of the decision date, raises doubts about the sustainability of a surge above $4,800.