Ethereum (ETH) open interest kept falling in 2024, getting close to the range last seen in January. Ethereum had a dynamic year, but derivative activity has been winding down in the past three months.
Ethereum (ETH) derivative trading is slowing down, in tune with the overall bearish sentiment. Open interest continued to slide since its local peak in June, and has returned to the levels from the beginning of the year.
The low open interest is not just a one-off event due to market dips, but an ongoing trend. In January, open interest ranged between $5B and $6B. As of September, open interest is down to $7.65B with a downward trend, sliding from peaks above $12B.
Open interest is an agile indicator, which may shift within days, indicating potential price action ahead. One possible scenario is for an inflow of short positions, awaiting ETH to dip further and even slide under $2,000.
In addition to open interest, funding rates have also unraveled under their 50-day moving average. Since the August 5 correction, ETH days with negative funding also arrived more often, further disrupting derivative markets.
Funding rates for ETH were mostly positive, due to an overall bullish bias. In the past two months, funding rates dips happen within days of each other, potentially harming the DeFi space.
The other effect of stagnancy and low open interest may be an unexpected short squeeze. In September, ETH pessimists also faced liquidations, so shorting is relatively cautions. Around 30% of leveraged positions are short on ETH, despite the selling pressure from whales.
ETH also faces net selling from almost all ETFs on a daily basis, with the occasional day of buying a few hundred tokens. The Ethereum Foundation and Vitalik Buterin seem to be done with selling, which may not be significant, but it sends a signal to the market.
The unraveling of open interest gained speed after the correction on August 5. After that, Ethereum hovered under $2,500, with regular dips under $2,300. Additionally, ETH has fallen to 0.04 BTC, close to its one-year low, shattering the narrative of becoming more dominant during the latest bull market.
September set a bearish tone for the entire market. For ETH, this extends the recent negative trend, with no attempts to stage a rally so far.
Whales and retail watch ETH from the sidelines
ETH sentiment from both retail traders and ‘smart money’ is cautiously bullish. The recent ETH drawdown causes a variety of reactions from small-scale buyers, swing traders and older whales.
Whales with more than 100K ETH continue their accumulation, extending the long-term trend of holding. There is also ongoing interest in locking ETH for staking. Holders with 10K to 100K ETH liquidated during the March market downturn, while those with 1K to 10K ETH sold during the August downturn.
Retail ETH usage is stagnant, as Ethereum is no longer the only onboarding chain for token swaps, NFTs or other small-scale activities. Approximately 40% of the ETH supply is held in whale wallets, with the potential to influence liquidity and impact prices. The top 100 ETH holders are the most potentially influential, holding more than 20% of the supply. The list of wallets includes exchanges, staking contracts and liquidity pools, but still sets the pace for the entire ETH ecosystem.
Ethereum ended the ultra sound money narrative
One of the main drivers of ETH growth was the supposed scarcity of the asset, as well as its behavior as sound money. However, the Ethereum network turned deflationary for only a limited period, then returned to a faster production of new coins.
In the short term, ETH turned out to be not scarce at all, and in fact the market had to absorb selling from Grayscale and other older wallets that wanted to cash out.
ETH reacted more like an altcoin, also hinging on overall hype for DeFi, passive income and fee-generating apps. By itself, ETH did not have the same appeal as Bitcoin (BTC) for a long-term store of value. As of 2024, inflation on Ethereum ranged between 0.5% and 0.74%, producing up to 900K new tokens in a year.
Cryptopolitan reporting by Hristina Vasileva
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