Ethereum Futures Premium Drops to 3 Months – Is ETH Undervalued?

Ether (ETH) investors may be disappointed due to the 12.5% ​​decline in the past three weeks, but does a deeper look at the asset's data bring more optimism or pessimism?

Some of the recent correction may be related to macroeconomic conditions, with the market not expecting an interest rate cut by the United States Federal Reserve (Fed) in March. Despite this, the Ether futures premium has fallen to a 3-month low, leading traders to speculate that something else is putting pressure on ETH's price.

An improvement in the Ethereum currency can lead to positive price momentum.

The Ethereum network's high gas fees are a constant source of discomfort for traders and investors, and puts it under intense pressure to compete with scalability-focused blockchains like BNB Chain, Solana, and Avalanche. Despite differences in decentralization across networks, the user experience is generally more favorable for Lab-1 solutions. Therefore, the value of Ethereum scalability solutions is of great importance.

On February 1, Ethereum core developer Tim Beiko announced that the latest Ethereum network upgrade tests were successful. Denkun's hard fork introduces proto-danksharding, which aims to reduce the costs of aggregate scalability solutions. Analysts expect the mainnet to be activated by March, although no official deadline has been announced by the Ethereum Foundation.

To highlight the importance of layer-2 solutions, four major networks – Arbitrum, Optimum, Manta and Base – hold a total value of $4.2 billion (TVL) locked in, which is more than BNB Chain's $3.5 billion in smart contract deposits, according to DefiLlama. More significantly, last week, as reported by L2Beat, Ethereum rollups worked 4.2 times per day, connecting more transactions to the mainnet.

The appetite for bullish ETH usage areas has decreased

Professional traders prefer monthly futures contracts due to the lack of liquidity. In independent markets, these instruments trade at a premium of 5% to 10%, given their extended settlement period.

The data shows that the ETH futures premium has been declining since January 2nd, but remained above the 10% threshold until January 23rd. Interestingly, the price of Ether fell by a modest 2.2% between January 2 and February 2, though it peaked at $2,715 on January 12 following the launch of a FOMO-fueled Bitcoin exchange-traded fund (ETF). Basically, the current neutral premium of 7% in ETH futures can be linked to the overestimated prices in the cryptocurrency markets.

As a point of comparison, the last time Ether futures hit 7% was on November 4, 2023, when the price of ETH was $1,860. Moreover, historical data shows that the 110-day trades below $1,900 resistance, confirming the lack of confidence at the time. However, those who had the courage to make a bullish bet on November 2023 saw Ether's price rally 21.5% from $1,850 to $2,250 in 30 days. Thus, long-term unhappiness in demand does not necessarily indicate a negative price volatility to come.

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Ether option markets are unclear about the value of ETH

One should analyze the options markets to rule out external factors that can only affect Ether futures. The 25% delta skew rejection at $2,600 on January 11th can be seen to have discouraged investors. In short, if traders expect a drop in the price of Ether, the skewness will rise above 7%, while bullish periods have a -7% skew.

Note how Ether options flirted with the bullish -7% limit on January 31st but quickly bounced back to neutral levels. In fact, the last time ETH's 25% delta skew held bullish territory for more than 24 hours was on December 4, 2023, after Ether's price rose from $1,560 to $2,250 in seven weeks. Therefore, the current neutral options indicator shows a lack of transparency rather than a lack of confidence in Ether's price potential.

Ether bulls set their eyes on the potential approval of the Ether ETF. On January 24, the US Securities and Exchange Commission (SEC) delayed its decision on BlackRock's proposal. Bloomberg EFF analyst Eric Balchunas expects a final decision from the SEC by May 23, putting the chances of approval at 70 percent. Given this encouraging and historical precedent, the drop in Ether futures premium to 7% should not be interpreted as an indication of bearishness.

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.