Ethereum Futures Premium Hits 1-Year High – Will ETH Price Follow?

Ether (ETH) price is down 14.7% from a high of $2,120 on April 16, 2023. However, two derivatives benchmarks suggest investors haven't felt this bullish in more than a year. Recent optimism warrants scrutiny as this divergence is a broader response to Bitcoin's (BTC) crash above $34,000 on October 24.

One possible reason for the increased enthusiasm among investors using ETH derivatives is the general market excitement regarding the approval of a Bitcoin exchange-traded fund (ETF) space in the United States. According to Bloomberg analysts, ongoing improvements in the space could be seen as a “good sign” of development and recent approvals of Bitcoin ETF proposals. This development is expected to push the entire cryptocurrency market to a higher price level.

Interestingly, comments made by US SEC Chairman Gary Gensler in 2019 illustrate his point of view. At the 2019 MIT Bitcoin Expo, Gensler called the SEC's position at the time “inconsistent” because it banned multiple Bitcoin ETF applications, while futures-based Bitcoin ETF products that don't involve physical Bitcoin have been around since December 2017.

Another reason for Ethereum investors to be bullish on using derivatives could be the price of the Denkun upgrade planned for the first half of 2024. This upgrade is set to improve data availability for the Layer-2 package, ultimately reducing transaction costs. Moreover, the update prepares the network for the future implementation of sharding (parallel processing) as part of the blockchain “Surge” roadmap.

In a statement released on October 31, Ethereum founder Vitalik Buterin stated that independent layer-1 projects are gradually migrating and can be integrated as layer-2 solutions of the Ethereum ecosystem. Buterin also says the costs associated with bundled payments are unacceptable to most users, especially for non-financial applications.

Challenges for Ethereum competitors

Ethereum's competitors are facing a challenge as software developers realize the costs of maintaining a complete record of network transactions. For example, SnowTrace, a popular blockchain explorer tool for Avalanche (AVAX), has announced its shutdown due to high costs.

Philip Liu Jr., head of strategy and operations at Ava Labs, pointed out the difficulties users face in self-verifying and storing data on single layer chains. Because of this, the high processing power required often leads to unexpected issues.

For example, on October 18, the Theta Networks team experienced an “edge case error” after a node upgrade, causing blocks on the main chain to halt production for several hours. Similarly, the Layer-1 blockchain Aptos Network (APT) experienced a five-hour outage on October 19, resulting in exchanges' deposits and withdrawals being halted.

Basically, the Ethereum network may not currently offer a solution to high fees and processing capacity bottlenecks. Still, she has an eight-year streak of improvement and improvements to the goal with few major setbacks.

Assessing bullishness in ETH derivatives markets

After reviewing the fundamentals surrounding the Ethereum network, it's important to examine the bullishness among ETH traders despite the negative performance of ETH, which is down 14.7% since its peak of $2,120 in April.

Ether futures premiums, which measure the difference between two-month contracts and the spot price, hit their highest level in more than a year. In a healthy market, the annual premium, or base rate, should typically fall in the 5% to 10% range.

Such information indicates that the demand for ETH long positions is growing, because the futures contract premium increased from 1% on October 23 to 7.4% on October 30, which is more than the neutral-to-energy limit of 5%. This rate hike follows a 15.7% rally in ETH price over two weeks.

Analyzing the options markets provides additional insight. The 25% delta skew in Ether options is a useful indicator of when arbitrage desks and market makers are paying in the background or low protection. When traders anticipate a drop in Ether's price, the bias increases by more than 7%. Conversely, happiness ratings show a negative 7% variance.

RELATED: 3 Reasons Why Ethereum's Price Has Declined Against Bitcoin

Notice how the 25% delta skew of Ether options reached a negative 16% on October 27th, the lowest in more than 12 months. During this period, defensive put options were trading at a discount, which is characteristic of excessive optimism. Additionally, the current 8% bearish options are a complete reversal from the 7% or more positive skew that existed until October 18th.

In summary, the drivers behind the bullish sentiment among Ether investors in the derivatives markets remain somewhat unknown. Traders may be awaiting approval for Ether spot ETF tools following the potential licensing of Bitcoin, or they may be banking on improvements planned to reduce transaction costs and eliminate the competitiveness of other blockchain networks such as Solana (SOL) and Tron (TRX).

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.