Ethereum price closes at $4K, but traders’ over-optimism is a warning sign.
Ether (ETH) bulls are on a roll, the price of the altcoin increased by 13% in 7 days, reaching the level of $3,900 for the first time since December 2021. The current market capitalization of $456 billion puts Ether far behind its competitors. However, excessive leverage using ETH derivatives poses a risk to the current bullish momentum.
Could Ether Price Explode Above $4,800 This Cycle?
Ether bulls see the possibility of the current bull run ending at a new all-time high, mirroring what Bitcoin (BTC) experienced on March 5, but excessive optimism poses a risk in terms of forced liquidity. To understand that $4,800 is a viable target price for this cycle, one must first address the criticism and FUD that could limit Ether's upside.
In addition to the common interpretation that the Ethereum network is not scalable, partially addressed by layer-2 solutions, some analysts cite Ethereum's foundational dependency and lack of regulatory transparency as factors holding back Ethereum's bullish momentum.
According to Gary Gensler, chairman of the US Securities and Exchange Commission, cryptocurrencies that allow investors to hold positions can be interpreted as a security, which “looks very similar to a lender – with some changes to the label.” But on May 23, the decision of the Ethereum exchange-traded fund (ETF) can settle the debate, and analysts estimate the chances of approval from 50% to 70%.
Although a part of the criticism of centralization is correct, according to a report from Electric Capital, the number of developers entering the Ethereum ecosystem will increase by 16,700 in 2023, which is four times more than the 4,705 flood to Solana. Therefore, it would be difficult to imagine that the growth of Ethereum is concentrated in a certain group of companies.
Ether derivatives indicate overconfidence and risk
Basically, the biggest short-term risk to Ether's price stems from overconfidence among traders employing derivative instruments. Total open demand for Ethercoins hit an all-time high on March 6, reaching $13.4 billion, indicating strong leverage.
More worryingly, Ether futures premiums rose to their highest levels in more than 18 months, measuring monthly contract prices against levels traded on regular spot exchanges.
Ether futures premiums crossed the neutral threshold of 10% on February 12 and recently reached 23%, indicating demand for long positions. While this reflects confidence among professional traders following a 68% year-on-year increase in 2024, it also increases the risk of reduced liquidity due to intraday volatility.
Likewise, demand for leveraged space from retailers rose to its highest level in 18 months.
Fixed contracts feature an embedded rate calculated every eight hours. A positive fund rate indicates a long-term increase in interest and a level above 0.05%, equal to 1% per week, indicates overconfidence.
RELATED: The Ethereum Network Is Fairly Underrated, But ETH Could Still See a 17x Return – Brian Russ
None of this would be a problem if the parameters of the Ethereum network are indicative of strength, but the latest data did not support further appreciation of the price of Ether.
Over the past 30 days, Ethereum decentralized applications (DApps) have experienced a 6% decrease in volume and an 11% decrease in the number of addresses. Meanwhile, competitors BNB Chain (BNB) and Solana (SOL) posted gains of 52% and 71%, respectively.
Ultimately, one can attribute the recent bullishness in Ether's price to the potential endorsement of spot ETFs. However, excessive leverage from retail and professional traders cast doubt on the sustainability of the rise above $4,800, more than 12 weeks before the decision date.
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.
