After the price of Ether (ETH) fell by 27% within three days, it finally bottomed out on January 22nd at USD 1,040.
The sharp correction liquidated future contracts worth $ 600 billion, but interestingly, Ether price rebounded to a new all-time high, although Bitcoin price continues to trade in a slight downtrend.
According to Cointelegraph, rising TVL and transaction volumes in the decentralized financial sector are responsible for the impressive surge in ether.
To determine if the current pump is reflecting a potential local spike, we will take a closer look at the data on drains and derivatives in the chain.
Exchange withdrawals indicate a concentration of whales
Increasing withdrawals from exchanges can be caused by several factors, including staking, crop farming, and buyers sending coins to a cold store. As a rule, a steady flow of net deposits indicates a short-term willingness to sell. On the other hand, net withdrawals are generally related to periods of whale accumulation.
As the graph above shows, on January 23, the centralized exchanges recently hit their lowest ether reserves since November 2018.
Although it is debated whether part of this Ether exodus is an internal transfer between Bitfinex cold wallets, there has been a clear net payout trend over the past month. Despite these “rumors”, the data suggest an accumulation.
This data is also in line with the DeFi’s Total Value Locked (TVL), which is hitting an all-time high of $ 26 billion, and signals that investors are taking advantage of the lucrative return opportunities that exist outside centralized exchanges.
Futures were overbought
By measuring the cost gap between futures and the regular spot market, a trader can measure the degree of upward movement in the market.
The 3-month futures should normally trade at an annualized premium (base) of 6% to 20% compared to regular cash exchanges. Anytime that ad fades or goes negative, it’s an alarming red flag. This situation is known as backwardation and it suggests that the market is turning bearish.
On the other hand, a sustainable base of over 20% signals excessive leverage by buyers, which creates the potential for massive liquidations and eventual market crashes.
The graph above shows that the premium hit a high of 6.5% on January 19, an annual rate of 38%. This level is viewed as extremely overbought, as traders need an even higher price increase before it expires in order to benefit from it.
Overbought derivatives should be viewed as a yellow flag, although it is normal to hold them on for short periods of time. Traders could temporarily exceed their regular leverage during the rally and later buy the underlying asset (ether) to adjust risk.
One way or another, the market adjusted during the Ether price crash, and the futures premium is currently at a healthy 4.5%, or 28% on an annual basis.
The spot volume remains strong and traders bought the dip
Profitable traders not only monitor futures contracts but also keep track of the volume on the spot market. Typically, small amounts indicate a lack of confidence. Hence, significant price increases should be accompanied by robust trading activity.
For the past week, Ether had an average daily volume of $ 6.1 billion, and while that number is far from its all-time high of $ 12.3 billion on Jan. 11, it’s still 240% higher than in December. Hence, the activity that supports the recent all-time high of $ 1,477 is a positive indicator.
Data provided by the exchange underscores the long-to-short net positioning of traders. By analyzing the position of each customer on site, perpetual and futures contracts, one can get a clearer view of whether professional traders are bullish or bearish.
With this in mind, there are occasional discrepancies in methodology between different exchanges so viewers should monitor changes rather than absolute numbers.
The top trader index at Binance and Huobi has held roughly the same ether position for the past few days. Huobi’s average over the past 30 days averaged a long-to-short ratio of 0.83, while traders at Binance averaged 0.94. The current value at 0.85 indicates a slightly negative mood.
OKEx is notable for the fact that the long-short ratio of top traders peaked at 2.0 and strongly favored longs in the early hours of January 22nd. However, it went back to January 24th, eventually bottoming out at 1.05. The strong net selling trend was reversed today as traders bought the decline and the indicator fell to 1.17 in favor of longs.
It should be noted that arbitrage desks and market makers make up a large part of the exchanges’ top trader metric. The unusually high futures premium would encourage these customers to create short positions in futures contracts while also buying ether spot positions.
Given Ether’s on-chain data suggesting whale hoarding, as well as the premium for healthy futures contracts, the market structure appears reliable.
The fact that top traders at OKEx also bought today’s dip is another indication that the rally should continue.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.