Look out below! Ethereum derivatives data hints at further downside from ETH

Published at: May 12, 2022

Ether (ETH) is down 38% in three weeks and the current $2,000 level is 59% below the $4,870 all-time high that was reached in November 2021. Additional newsflow that added to the current marketwide volatility were the bankruptcy fears that emerged after Coinbase, the largest United States exchange, reported a $430 million first-quarter 2022 loss.

In the most recent 10-Q filing Coinbase included the following disclosure:

“In the event of a bankruptcy, the crypto assets we hold on behalf of our customers may be subject to bankruptcy proceedings.”

Regulatory uncertainty was also partially responsible for Ether’s sharp correction. On May 11, Kukmin, a South Korea-based newspaper, reported a leaked draft of the upcoming governmental Digital Asset Basic Act (DABA) bill. The administration of South Korea expects to introduce a regulatory framework for initial coin offerings (ICOs), along with a 20% tax on crypto gains above $2,100 per year.

Another factor impacting markets is investors’ confidence in stablecoins. On May 11, USD stablecoin Tether (USDT), the largest stablecoin by market capitalization, broke below its peg and traded under $0.99 on major exchanges. However, Tether and Bitfinex chief technology officer Paulo Ardoino highlighted that USDT has maintained its stability through multiple black swan events and “continues to process redemptions normally.”

Options traders are unwilling to offer downside protection

To understand how larger-sized traders are positioned, one should look at Ether’s futures and options market data. The 25% delta skew is a telling sign whenever arbitrage desks and market makers overcharge 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.

The skew indicator has been above 10% since April 23 and it skyrocketed to a 29% peak on May 12. In addition to signaling extreme fear from options traders, the metric has reached the highest level ever registered.

The past three weeks showed a remarkable sentiment deterioration, and the current 27% delta skew shows a clear unbalanced risk for unexpected upward and downward price swings.

Long-to-short data confirms traders are avoiding risk

The top traders’ long-to-short net ratio excludes externalities that might have impacted specific derivatives instruments. By analyzing these top clients’ positions on the spot, perpetual and futures contracts, one can better understand whether professional traders are leaning bullish or bearish.

There are occasional methodological discrepancies between different exchanges, so viewers should monitor changes instead of absolute figures.

Even though Ether plunged 29% since March 11 to a $1,700 low, professional traders reduced their bullish bets, according to the long-to-short indicator. OKX’s top traders’ ratio decreased from 1.25 to the current 0.85 level

Binance data also shows these traders reducing their longs from 1.03 to 0.98, while at Huobi, it stood unchanged at 1.00. This signals that there has been hardly any buying activity from whales and market makers amid the sharp correction in Ether price.

There is simply no way to sugarcoat Ether’s current derivatives data because both indicators reflect a lack of confidence from professional investors. The option traders overcharging for downside protection suggests that Ether can go below $1,700, according to risk metrics.

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.