Ether (ETH) bulls are experiencing a strong upward trend as the altcoin’s price has surged by 13% in the span of 7 days, reaching a level of $3,900. This is the first time Ether has reached this price since December 2021. With a market capitalization of $456 billion, Ether has distanced itself from its competitors. However, the excessive use of leverage through ETH derivatives poses a risk to the current bullish momentum.
Could the price of Ether surpass $4,800 in this cycle?
Ether bulls believe that there is a good chance that the current bull run will result in a new all-time high, similar to what Bitcoin (BTC) experienced on March 5th. However, excessive optimism presents a risk in terms of forced liquidations. To determine if $4,800 is a realistic target price for this cycle, it is necessary to address the criticisms and FUD (fear, uncertainty, and doubt) that could limit Ether’s upward potential.
Apart from the common belief that the Ethereum network lacks scalability, which has been partially resolved through layer-2 solutions, some analysts point to the dependence on the Ethereum Foundation and the lack of regulatory clarity as factors hindering Ether’s bullish momentum.
According to Gary Gensler, the chair of the U.S. Securities and Exchange Commission (SEC), cryptocurrencies that allow users to stake their positions could be considered securities, as they resemble lending with some labeling changes. However, the decision on the spot Ethereum exchange-traded fund (ETF) on May 23rd could settle this debate, with analysts estimating a 50% to 70% chance of approval.
While some of the concerns about centralization are valid, a report from Electric Capital shows that the number of developers entering the Ethereum ecosystem increased by 16,700 in 2023, almost four times more than the influx to Solana, which was 4,705. This makes it difficult to argue that Ethereum’s development is concentrated in a specific group of companies.
Ether derivatives indicate overconfidence and pose a risk
The biggest short-term risk to Ether’s price comes from traders’ overconfidence in using derivative instruments. The total open interest of Ether futures reached an all-time high of $13.4 billion on March 6th, indicating a significant demand for leverage.
Even more concerning is the Ether futures premium, which measures the price of monthly contracts against levels traded on regular spot exchanges. This premium has reached its highest point in over 18 months.
The Ether futures premium surpassed the 10% neutral threshold on February 12th and recently peaked at 23%, indicating excessive demand for long positions. While this reflects the confidence of professional traders following a 68% increase in price since the beginning of the year, it also increases the risk of cascading liquidations due to intraday volatility.
Similarly, the demand for bullish leverage positions from retail traders has reached its highest levels in over 18 months.
Perpetual contracts have an embedded rate that is usually recalculated every eight hours. A positive funding rate indicates an increased demand for leverage longs, and rates exceeding 0.05% (equivalent to 1% per week) indicate overconfidence.
None of these factors would be a concern if the Ethereum network metrics indicated strength. However, the latest data does not support further appreciation of Ether’s price.
Over the past 30 days, Ethereum decentralized applications (DApps) have experienced a 6% decline in volume and an 11% decrease in the number of active addresses. In contrast, competitors BNB Chain (BNB) and Solana (SOL) have seen a 52% and 71% growth in volume, respectively.
Ultimately, the recent bullishness in Ether’s price may be attributed to the potential approval of a spot ETF. However, the excessive leverage used by both retail and professional traders, more than three months before the decision date, raises doubts about the sustainability of a surge above $4,800.
This article does not provide investment advice or recommendations. Every investment and trading decision carries risk, and readers should conduct their own research before making a decision.