Ether (ETH) bulls are currently experiencing a successful run as the altcoin’s price has surged by 13% in the span of 7 days, reaching the $3,900 level. This is the first time since December 2021 that Ether has reached this level. With a market capitalization of $456 billion, Ether is currently distancing itself from its competitors. However, there is a potential risk to this bullish momentum due to excessive leverage through ETH derivatives.
Can Ether surpass the $4,800 mark in this cycle?
Bulls of Ether believe that there is a decent chance that the current bull run will lead to a new all-time high, similar to what Bitcoin (BTC) experienced on March 5. However, there is a risk of forced liquidations due to excessive optimism. In order to determine if $4,800 is a realistic target price for this cycle, it is important to address the criticism and fear, uncertainty, and doubt (FUD) that may hinder Ether’s potential growth.
One common criticism is that the Ethereum network is not scalable. While this issue has been partially resolved through layer-2 solutions, some analysts argue that Ether’s bullish momentum is limited due to its dependence on the Ethereum Foundation and the lack of regulatory clarity.
According to the chair of the U.S. Securities and Exchange Commission (SEC), Gary Gensler, cryptocurrencies that allow holders to stake their position could potentially be classified as securities. Gensler argues that this is due to the similarities between staking and lending. However, the decision on the spot Ethereum exchange-traded fund (ETF) on May 23 could potentially settle this debate, with analysts estimating a 50% to 70% chance of approval.
While there is some validity to the criticism regarding centralization, a report from Electric Capital reveals that the number of developers entering the Ethereum ecosystem in 2023 increased by 16,700, which is nearly four times more than the influx to Solana. This makes it difficult to claim that Ethereum’s development is concentrated in a specific group of companies.
Ether derivatives indicate overconfidence and pose a risk
The main short-term risk for Ether’s price stems from overconfidence among traders who use derivative instruments. The aggregate open interest of Ether futures reached an all-time high of $13.4 billion on March 6, indicating significant demand for leverage.
Of even greater concern is the Ether futures premium, which measures the price of monthly contracts against levels traded on regular spot exchanges. This premium has reached its highest point in over 18 months.
The Ether futures premium surpassed the neutral threshold of 10% on February 12 and recently peaked at 23%, indicating excessive demand for long positions. While this reflects the confidence of professional traders following a 68% increase in 2024, it also increases the risk of cascading liquidations due to intraday volatility.
Similarly, the demand for bullish leverage positions from retail traders has reached its highest levels in over 18 months.
Perpetual contracts feature an embedded rate that is recalculated every eight hours. A positive funding rate indicates increased demand for leverage longs, and rates exceeding 0.05% (equivalent to 1% per week) indicate overconfidence.
None of these issues would be problematic if the Ethereum network metrics indicated strength. However, the latest data does not support further appreciation in Ether’s price.
Over the past 30 days, Ethereum decentralized applications (DApps) have experienced a 6% decline in volume and an 11% decrease in the number of active addresses. In contrast, competitors BNB Chain (BNB) and Solana (SOL) have seen a 52% and 71% increase in volume, respectively.
Ultimately, the recent bullishness in Ether’s price can be attributed to the potential approval of a spot ETF. However, the excessive leverage from both retail and professional traders, this far in advance of the decision date (more than 12 weeks), raises doubts about the sustainability of a surge above $4,800.
This article does not provide investment advice or recommendations. Every investment and trading decision carries risk, and readers should conduct their own research before making a decision.