Record $ 8 Billion Open Interest In Ethereum Futures Proves The Pros Are “Here”


The price of Ether (ETH) continues to rise with many analysts pointing to the $ 3,000 level as a short-term target. All of this ‘success’ takes place when Ether finds itself in a bottleneck regarding high fees, network congestion, and a tense situation with miners.

As decentralized finance applications (DeFi) took center stage and aggregate volumes on exchanges surpassed $ 4 billion per day, the price of Ether rose 135% to date, marking a new all-time high of USD. 2,300 on April 13.

This impressive price surge caused Ether’s open interest to hit a record high of USD 8 billion. The figure accounted for 50% of the Bitcoin (BTC) markets just two months ago.

Some investors might say that derivative contracts pose a risk of further corrections due to settlements, but we must remember that the same instrument can be used for hedging and arbitrage.

Added open interest in Ether futures. Source: Bybt.

Not all short sellers aim for lower prices

While the average retail trader relies on perpetual futures (reverse swaps) primarily for short-term leverage positions, market makers and professional traders will tend to seek returns.

This is generally achieved through strategies of “cash and carry” that combine option trading. Therefore, to understand whether the current open interest represents a risk or an opportunity, investors should look at other indicators such as the financing rate.

Massive sell-offs often occur when (long) buyers are overly optimistic. Therefore, a 7% intraday correction forcibly removes all those who use leverage of 15 times or more. Despite being news, the billion dollar orders would represent only 6% of the current average volume.

Ether futures aggregate volume. Source: Coinalyze

As shown above, Ether futures aggregate volumes will rise above $ 25 billion when additional volatility occurs. This data means that the eventual impact of the liquidation could be even more insignificant.

The impact of futures goes both ways

Analysts tend to ignore the impact of the buy side of futures contracts, especially during a bull run. No one blames derivatives for a 7% price surge, although that could have accelerated the move. This theory is especially true when considering the high financing rate charged to longs. Traders should avoid these moments unless they are confident that the rally will continue.

8-hour funding rate of Ether perpetual futures. Source: Coinalyze

As long as longs require the most leverage, the funding rate will be positive. A rate of 0.15% every 8 hours equals 3.2% per week. Therefore, the arbitrage desks and whales will buy Ether on regular exchanges and at the same time sell the futures to collect the funding fee. This operation is known as “cash and carry” and it does not depend on the markets going up or down.

Markets eventually normalize themselves

As the current open interest in futures continues to rise, it reflects that the markets are becoming even healthier, allowing even larger players to engage in derivatives trading.

The listing on CME is undoubtedly a major milestone for Ether, and this is confirmed by the $ 8 billion open interest mark.

The funding rate will be adjusted as more participants are welcomed on the side of the “cash and carry” or by terminating positions due to high costs.

It doesn’t necessarily end with multi-billion dollar liquidations, but it certainly increases the risk of them occurring. However, these same contracts could have been used to push the price of Ether, offsetting the impact over time.

The views and opinions expressed here are solely those of the Author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trade move involves risk, you should do your own research when making a decision.

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