Ethereum [ETH] has experienced a significant downturn in its derivative market, indicating a potential change in market sentiment.
However, deciphering this decline can yield varying interpretations based on the performance of other factors, such as spot volume.
Decrease in Ethereum’s Funding Rate
New data from CryptoQuant has unveiled that Ethereum’s Funding Rate has reached its lowest point this year, marking a sharp decrease in buying interest among derivative traders.
Funding Rate serves as a crucial indicator in Futures markets to gauge the cost of maintaining long (buy) or short (sell) positions.
A negative Funding Rate implies that short sellers are compensating long holders to retain their positions, indicating a bearish outlook.
ETH’s Funding Rate plummeting to its lowest level of the year indicates a waning desire to purchase Ethereum on leverage via derivatives, potentially signaling a bearish trend in the short run.
The downturn in the Funding Rate signifies a lack of trader enthusiasm in the derivatives market, which could exert additional downward pressure on Ethereum’s price.
Potential for Ethereum Short Squeeze
With fewer traders inclined to take long positions, Ethereum’s downward trajectory may persist unless spot buyers intervene to absorb selling pressure.
While the low Funding Rate denotes a bearish sentiment, it also lays the groundwork for a likely short liquidation chain reaction. If spot buyers enter the market in substantial numbers, the negative Funding Rate could swiftly reverse.
This scenario compels short sellers to close their positions, triggering forced buying (short squeeze) that can drive up the price.
Trend in ETH’s Volume
Analysis of Ethereum’s spot volume on Santiment indicates that the average volume has held steady at approximately $14 billion in recent weeks.
This consistent volume plays a vital role in upholding price stability, especially amid Ethereum’s Funding Rate hitting rock bottom this year.
Ethereum’s spot volume has remained relatively constant, averaging $14 billion. This stable volume likely shielded ETH from a more pronounced price slump.
Despite the pessimistic sentiment from derivative traders reflected in the negative funding rate, sustained spot volume has provided support.
If the spot volume dips below the $14 billion mark, Ethereum might encounter heightened downward pressure.
Considering the Funding Rate is already at historic lows, a drop in spot volume would diminish buying interest essential to counter the adverse sentiment prevailing in the derivatives market.
The current rock-bottom Funding Rate indicates short positions dominate the derivatives market. A reduction in spot volume could lead to insufficient demand to absorb selling pressure, resulting in price declines.