Ethereum Buy Signal? Derivatives Data Turns Bullish

What to Know:

• Ether (ETH) is facing significant downward pressure, underperforming compared to other major cryptocurrencies like Bitcoin and XRP.
• Sell pressure on ETH is coming from various sources, including Vitalik Buterin, derivatives traders unwinding positions, and ETH treasury companies facing losses.
• The lack of a clear catalyst for buying and institutional preference for Bitcoin are contributing to ETH’s struggle to maintain its value.

Ether (ETH) has been under considerable pressure recently, falling below the $2,000 mark, with sell pressure coming from multiple areas of the market. The second-largest cryptocurrency has significantly underperformed compared to other large-cap cryptocurrencies such as Bitcoin (BTC) and XRP. This divergence is attributed to various factors, including sales by Ethereum founder Vitalik Buterin, traders unwinding leveraged positions, and ETH treasury companies facing substantial losses.

Derivatives Market and ETH Sell Pressure

The derivatives market is playing a significant role in the current ETH sell-off. Onchain analysts have identified entities offloading large amounts of ETH on decentralized derivatives venues to repay loans on Aave. These wallets have sold approximately 47,000 ETH (around $120 million) in the past few days, including a substantial 31,700 ETH in a mere five-hour period, according to data from MLm onchain. These entities still hold nearly 50,000 ETH as collateral on Aave, with about $86 million in USDC borrowed against it. As ETH’s price declines, the position is nearing liquidation, prompting further selling to maintain solvency. This creates a feedback loop where price drops weaken collateral, leading to debt repayment and more ETH entering the market, exacerbating the downward pressure on ETH. The situation highlights the interconnectedness of decentralized finance (DeFi) platforms and the potential for cascading liquidations to impact the broader market.

Institutional Bias and the Struggle for ETH

Anthony Scaramucci, former White House communications director, suggests that ETH’s struggle is partly due to institutional investors’ preference for Bitcoin. He believes institutions tend to favor the oldest and most established asset in the crypto space, which is Bitcoin. While he acknowledges the potential for institutions to eventually invest in Ethereum, Bitcoin remains the primary focus for now. This institutional bias towards Bitcoin impacts ETH’s ability to attract significant investment, hindering its price recovery. Furthermore, some traders engage in delta-neutral strategies, buying spot ETH and lending it on platforms like Aave while simultaneously shorting it on futures exchanges. These traders may need to increase their short positions if funding rates skew, which could lead to further sell pressure on ETH. This complex interplay of market dynamics contributes to the ongoing challenges faced by ETH.

The Impact on ETH Treasury Companies

The emergence of ETH treasury companies, which buy and hold ETH as a long-term investment, was initially seen as a positive development for the cryptocurrency. These companies were expected to act as a new class of long-term buyers, absorbing supply and providing a price floor. However, with ETH’s significant decline since August, many of these companies are now facing substantial losses on their ETH holdings. Tom Lee’s BitMine (BMNR) is a notable example, holding 4.29 million ETH tokens, valued at $9 billion, with 57% staked for yield. Despite a total investment of $16.3 billion, Dropstab data indicates an unrealized loss of $7.3 billion. The company even attempted to buy the dip earlier this month, purchasing $100 million worth of ETH at $2,300, but this effort failed to halt the downward trend. Instead of providing support, these treasury holdings are now perceived as an overhang, as the market recognizes their trapped positions.

Analyzing the Lack of Buyers for Ether

The current predicament of Ether is not solely attributable to a single entity or liquidation event. The issue lies in the widespread sell pressure originating from various sources, including founders reducing their exposure, leveraged traders unwinding their positions, and underwater holders seeking to exit. While Ethereum remains the dominant smart contract platform, the market dynamics are currently overshadowing its fundamental strengths. ETH is currently trading more like an asset that investors are hesitant to hold, except for a few, like Tom Lee. This lack of buying interest, combined with the persistent selling pressure, presents a challenging environment for ETH to recover its value in the short term. Looking ahead, the future performance of ETH will depend on its ability to attract renewed buying interest and overcome the current market sentiment.

In conclusion, Ether is navigating a challenging period marked by significant selling pressure and a lack of clear buying catalysts. The confluence of factors, including derivatives market dynamics, institutional preferences, and the struggles of ETH treasury companies, has contributed to its recent underperformance. The path forward for ETH will depend on its ability to regain investor confidence and overcome the current market headwinds.

Related: XRP Signals Institutional Shift Amid Bitcoin Drop

Source: Original article