Ethereum futures open interest is at a 19-month high, but ETH price weakness is intensifying
Ether (ETH) experienced a 10% correction between July 31 and August 2, retesting the $3,000 support for the first time since July 8. This movement significantly outpaced the broader cryptocurrency market, which fell by 6.8% during the same period. Despite this, demand for Ether futures rose to its highest level in seven months, prompting traders to speculate that a rally to $3,600 is the next likely move.
Increasing interest in Ether futures is not necessarily bullish
The increased activity in ETH futures contracts reflects the interest of institutional investors, as it measures the willingness to use open interest. However, buyers (long) and sellers (short) are always matched, so an increase in open interest does not necessarily indicate a positive outlook.
Ether's decline may be due in part to a lack of net inflows from Ether exchange-traded funds (ETFs), which recently launched in the United States. Although there were some inflows into BlackRock's iShares Ethereum Trust and Fidelity Ethereum funds, these were offset by outflows from the Greyscale Ethereum Trust, which predates the ETF conversion.
Ether's fall below $3,000 led to long liquidity with $141 million used in 48 hours, further fueling the correction. However, this has not stopped other traders from entering the market regardless of whether the price of Ether is rising or falling. Thus, total open interest in Ether futures increased by 5% in seven days, reaching 4.6 million ETH, the highest level since January 2023.
Buyers should analyze how monthly ETH futures contracts compare to regular spot exchanges to determine if they are more leveraged. In independent markets, these derivatives trade at 5% to 10% higher, annualized returns to compensate for longer settlement times. Therefore, if traders are aggressive, this indicator may fall below that threshold.
Ether monthly futures contracts showed modest optimism in the days leading up to the ETF's launch on July 23, with the futures premium reaching 12 percent. However, net outflows from spot EFAs and a broader crypto market correction pushed the index down to 8% on August 2. This level is neutral, but not unusual considering a 10% price drop in 24 hours.
Retail demand for long used ETH has stopped
To assess the interest of retail traders in Ether futures, one should examine the funding rate of the perpetual contract (reverse swap). Like monthly contracts, these instruments closely track the spot price due to their short settlement periods. Typically, exchanges adjust risk every eight hours, asking for a fee on the side and asking for more leverage, meaning that longs or shorts pay the fee.
In independent markets, the eight-hour funding rate is from zero to 0.016%, equal to 1.3% per month. During periods of heightened optimism, this rate can easily exceed 0.025% or 2.1% per month.
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Ether's eight-hour funding rate is stable at 0.008%, equal to 0.7% per month, which is in neutral territory. This was typical over the past few days, indicating that retailers were not overextended before the unexpected price drop to $3,000.
The main driver of the increase in open interest for Ether futures is often the cash and carry trade, an independent arbitrage strategy. Investors sell futures contracts to capture the premium at the same time as buying the position or ETF to hedge their risk. Therefore, in terms of ETH derivatives, there is currently no indication that traders expect a short-term price pump.
This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.
