ETH derivatives show pro traders are worried about Ethereum’s $2.5K support

Ethereum

Ether (ETH) investors are having a rough time in 2022, with ETH accumulating 25% losses year-to-date as of March 17. Still, the cryptocurrency has bounced multiple times near $2,500 over the past couple of months, signaling a solid support level.

Ether/USD price at FTX. Source: TradingView

On March 15, Ethereum developer Tim Beiko announced that the Kiln testnet — formerly Ethereum 2.0successfully passed the Ethereum “Merge.” The process involves taking Ethereum’s Execution Layer from the existing proof-of-work layer and merging it with the Consensus Layer from the Beacon Chain. The end goal is to turn the blockchain into a proof-of-stake network.

The United States Federal Open Market Committee (FOMC) increased interest rates to 0.50% on March 16 — the first such move since 2018. The monetary authority warned of persisting “upward pressure on inflation,” precisely the problem that cryptocurrencies’ digital scarcity aims to solve.

Investors fear that further rate hikes by the FOMC could have negative consequences on risk markets. For example, a higher cost of borrowing reduces economic stimulus, creating a hurdle for businesses’ expansion and consumer spending.

Regardless of its potential, Ether’s 80% historical volatility shifts most investors’ perception to see it as a risky asset that will inevitably succumb to an eventual broader market correction.

Ether futures show modest sentiment improvement

To understand how professional traders are positioned, one should look at Ether’s futures and options market data. Firstly, the basis indicator measures the difference between longer-term futures contracts and the current spot market levels.

The annualized premium of Ether futures should run between 5% and 12% to compensate traders for “locking in” the money for two to three months until the contract expires. Levels below 5% are extremely bearish, while numbers above 12% indicate bullishness.

Ether 3-month futures’ annualized premium. Source: Laevitas

The above chart shows that Ether’s basis indicator recovered from 2% on March 13 to the current 3.5%. However, such a level falls below the 5% threshold expected on neutral markets, signaling that pro traders are far from comfortable holding ETH futures longs.

Thus, one can assess that an eventual break of the $3,200 resistance will catch those investors off guard, creating  strong buying activity to cover short positions.

Options traders fear ETH could drop lower

Ether’s daily closing price has been ranging from $2,500 to $3,000 for the past 27 days, making it difficult to discern a direction in the market. In that sense, the 25% delta skew is extremely useful, as it shows whether arbitrage desks and market makers are overcharging for upside or downside protection.

If those traders fear an Ether price crash, the skew indicator will move above 10%. On the other hand, generalized excitement reflects a negative 10% skew. That is precisely why the metric is known as the pro traders’ “fear and greed” metric.

Related: How professional Ethereum traders place bullish ETH price bets while limiting losses

Ether 30-day options 25% delta skew: Source: Laevitas

As shown above, the skew indicator has been over 10% since March 11, indicating fear, as these options traders are overcharging for downside protection.

Even though there was a modest improvement on Ether’s futures premium, the indicator remains on a bearish level. Considering the ETH options markets pricing a higher risk of downside, it is safe to conclude that professional traders are not confident that the current $2,500 support will hold.

However, not everything is lost for Ether bulls, as the cheap futures premium offers the opportunity to leverage long at a low cost. As long as the Ethereum network continues to advance on solving its scalability problem, it is still possible that the $3,200 resistance gets revisited considering the global macroeconomic uncertainty and inflation.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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