Ether (ETH) price surged 14% from February 26 to February 28, reaching its highest level in nearly two years at $3,484. However, this increase coincided with a rise in the cost of bullish leverage positions, which is somewhat concerning. Some investors believe that excessive optimism driven by fear of missing out (FOMO) has increased the risk of cascading liquidations.
It’s important to note that not all Ether leverage demand is due to risky bets. Some traders may need temporary leverage while they raise cash, which is common in the market. This can cause the funding rate to soar for a few days or even weeks.
Some analysts argue that investors’ increased optimism towards Ether’s price is due to the upcoming Dencun hard fork on March 13. This upgrade will introduce several improvements, including proto-danksharding, which aims to reduce layer-2 transaction fees. The expected upgrade will greatly reduce the data registry cost for Ethereum’s preferred scaling solution, rollups.
Uniswap, Ethereum’s leading decentralized exchange (DEX), has already announced plans to launch a v4 implementation, which means users can expect to experience benefits following the Dencun upgrade. Additionally, inscription costs on the network are expected to drop by 90%, according to analyst TrustlessState on X social network.
Scalability has been a challenge for Ethereum, with high transaction fees. However, this has not stopped network deposits (TVL) from reaching the highest level since July 2022 at ETH 30.5 million.
The growth in deposits reflects the emergence of new decentralized finance (DeFi) industries and the successful strategy of interoperability protocols. Investors’ appetite for ETH also stems from the growing demand for the network’s decentralized applications.
To determine whether excessive leverage drove Ether’s recent rally, it’s important to analyze ETH derivatives markets. Perpetual contracts include an embedded rate that is recalculated every eight hours. A positive funding rate indicates increased demand for leverage among long positions, while a negative rate signals the need for higher leverage among shorts.
On February 28, the unexpected volatility triggered $102 million in ETH forced liquidations, with longs representing $66 million. This movement also increased the leverage of existing bullish positions. The present funding rate of 0.06% for ETH is higher than the previous couple of weeks, which may be deemed unsustainable if it holds for a longer period.
Therefore, while ETH longs are at risk of liquidation, attributing the rally solely to excessive leverage is incorrect. The indicator was relatively calm until February 27, after Ether’s price had already gained 42% in the previous 30 days.
This article provides general information and should not be taken as legal or investment advice. The views expressed here are the author’s alone and do not necessarily reflect the views of Cointelegraph.