Ethereum [ETH] has experienced a significant decrease in its derivative market, indicating a potential shift in overall market sentiment.
However, the interpretation of this decrease can yield varied conclusions based on the performance of other factors, such as spot volume.
Decline in Ethereum’s Funding Rate
Recent data from CryptoQuant has shown that Ethereum’s Funding Rate has reached its lowest point this year, indicating a notable decline in buying interest among derivative traders.
Funding Rate serves as a crucial metric in Futures markets to assess the cost associated with holding long (buy) or short (sell) positions.
A negative Funding Rate implies that short sellers are compensating long holders to maintain their positions open, hinting at a bearish sentiment.
The drop in ETH’s Funding Rate to its yearly low portrays a waning desire to purchase Ethereum through leverage using derivatives. This could be construed as a pessimistic signal for the short-term price outlook.
The reduction in the Funding Rate signifies a lack of trader enthusiasm in the derivatives market, potentially adding downward pressure on Ethereum’s price.
Potential for Ethereum Short Squeeze
As fewer traders opt for long positions, Ethereum’s downward trajectory may persist unless spot buyers intervene to absorb selling pressure.
Although the low Funding Rate denotes a bearish sentiment, it also lays the groundwork for a likely short liquidation chain reaction. A substantial inflow of spot buyers could rapidly reverse the negative Funding Rate.
This scenario would compel short sellers to exit their positions, triggering forced buying (short squeeze) that could propel the price upwards.
Trends in ETH’s Trading Volume
An evaluation of Ethereum’s spot volume on Santiment has indicated that the current average volume has remained stable at approximately $14 billion over the recent weeks.
This sustained volume is crucial for upholding price stability, particularly as Ethereum’s Funding Rate has dipped to its lowest point this year.
Ethereum’s spot volume has shown relative steadiness, averaging around $14 billion. This consistent volume likely shielded ETH from experiencing a more severe price drop.
This resilience is observed despite the bearish sentiment prevalent among derivatives traders, as manifested by the negative Funding Rate.
In addition, if the spot volume dips below the $14 billion range, Ethereum may encounter heightened downward pressure.
Given the already-record low Funding Rate, a decline in spot volume would diminish buying interest necessary to counter the negative sentiment in the derivatives market.
The existing low Funding Rate suggests a prevalence of short positions in the derivatives market. A decrease in spot volume could result in insufficient demand to absorb selling pressure, potentially leading to price depreciation.