The price of Ether (ETH) experienced a significant correction of 14% on January 3rd, dropping from $2,380 to $2,050 in less than two hours. This price level had not been seen since December 1, 2023, and the unexpected swing led to the liquidation of $100 million worth of ETH long future contracts, which were leveraged bets on the price increase.
Traders are now questioning the significance of this price correction and whether it indicates the end of the bullish momentum that followed three unsuccessful attempts to break above $2,400 in the past month. Interestingly, this was the third time that Ether’s price dropped below $2,150 during the same period, making it difficult to argue that the bullish momentum is over.
Upon analyzing the price chart, one notable observation is the swift recovery to $2,230 on January 3rd, suggesting that whatever triggered the panic selling and derivatives liquidations has weakened. Some speculate that the trigger was a market analysis released on January 3rd, which pointed to the denial of the spot Bitcoin ETF, published by Matrixport. It is worth noting that Matrixport was co-founded by Jihan Wu, who is known for his successful venture in the ASIC miner business at Bitmain.
Investors are also taking into account the latest comments from Eric Balchunas, a senior ETF analyst at Bloomberg. Balchunas stated in an interview with Cointelegraph that the approval odds for the Bitcoin ETF remain at 90%. However, he reiterated that it might take longer for the final decision from the U.S. Securities and Exchange Commission to be reached. Essentially, the markets have overreacted in both directions, showing excessive confidence in the January 10th deadline and failing to differentiate between Matrixport analysts’ opinions and actual news and events.
According to attorney and commercial litigator Joe Carlasare, the market was overbought, indicating that buyers were using excessive leverage, making them an easy target for whales and market makers. This conclusion is supported by an analysis of the ETH monthly futures annualized premium, which should typically range between 5% and 10% in healthy markets.
The data shows a growing demand for leveraged ETH long positions, as the futures contract premium surged from 11% on December 18, 2023, to 27% on January 2, 2024. However, sustaining such positions for longer periods became costly for buyers. This surge in the metric followed a 15% rally in ETH’s price during that period.
The last time Ether bulls experienced such a significant loss in the futures markets was on August 17, 2023, when $170 million worth of long positions were liquidated. A similar intraday 15% correction occurred, dropping the price from $1,800 to $1,530, but ETH quickly rebounded to $1,680 within two hours. However, the price recovery did not hold in the medium term, as ETH revisited the $1,530 bottom on September 11, 2023.
To assess the exposure of whales and arbitrage desks using derivatives, it is important to examine Ether options volume. By analyzing put (sell) and call (buy) options, we can estimate the prevailing bullish or bearish sentiment.
With the exception of a brief period on December 19, 2023, ETH put options have consistently lagged behind call options in terms of volume, approximately by a factor of two. This suggests reduced demand for protective strategies, reinforcing the confidence and excessive optimism observed in the Ether futures markets.
The cause of the 14% flash crash on January 3rd may never be definitively determined. However, based on the analysis of Ether derivatives markets, it appears that investors became overconfident and heavily relied on excessive leverage. This does not necessarily invalidate Ether’s bull run or make gains above the $2,400 resistance less likely before the ETF decision. Data indicates that the market is healthier, at least from a derivatives perspective.
Please note that this article does not provide investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research before making a decision.