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Traders Take a Neutral Position After Seeing Massive Liquidation in Ethereum Futures Contracts

The price of Ether (ETH) fell by around 33% between November 7th and November 9th. This is after his impressive $260 million in future long contracts (buyers) was liquidated. Leveraged traders were surprised that price movements caused the biggest impact since Aug. 18 on derivatives exchanges.

Ether/USD 4-hour price on Bitfinex.Source: Trading View

The $1,070 price level, which traded on November 9th, was the lowest since July 14th and marked a 44% correction in three months. This unfavorable price move was attributed to the FTX exchange’s bankruptcy on Nov. 8 after customer withdrawals were suspended.

It is worth noting that the 10.3% hourly rise occurred on November 8th. This is just before the sharp adjustment. Price action mimicked that of Bitcoin (BTC) as the major cryptocurrency surged to $20,700 but then fell to $17,000 in three hours.

The former deputy leader of futures open interest shared a disguised and toxic relationship with Alameda Research, a hedge fund and trading firm managed by Sam Bankman-Fried.

The bankruptcies of FTX and Alameda Research raise multiple questions about regulation and contagion. For example, U.S. Commodity Futures Trading Commission (CFTC) Commissioner Kristin Johnson said on his Nov. 9 that recent cases show the sector needs more scrutiny. rice field. Additionally, Paolo Ardoino, CTO of the Tether (USDT) stablecoin, has attempted to defuse rumors of exposure to FTX and Alameda Research. post on Twitter.

Let’s take a look at crypto derivatives data and understand if investors are still risk averse to Ether.

Futures market enters backwardation

Retail traders generally avoid quarterly futures due to the price differential with the spot market. Nonetheless, it is the preferred method of professional traders as it guards against the fluctuations in funding rates that often occur with perpetual futures contracts.

Annualized Premium for 3-Month Ether Futures.Source: Levitas

This indicator should trade at a premium of 4% to 8% per annum in healthy markets to cover the costs and associated risks. Considering the above data, it becomes clear that derivatives his trader has been bearish over the past month as Ether futures premiums have been below 0.5% all the time.

More importantly, the Ether futures premium entering backwardation means that short (bearish bet) demand is very high. The seller pays 4% per annum to maintain the position. This data reflects the reluctance of professional traders to add leveraged long (bullish) positions, despite the small cost.

The Options Market Was Neutral Until Nov. 8

Still, Ether also needs to be analyzed An options market to eliminate the externalities inherent in futures commodities. For example, 25% delta skew is a sign that market makers and arbitrage desks are overcharging for upside or downside protection.

Ether 60 Day Option 25% Delta Skew: Source: Laevitas

In a bear market, the skew indicator exceeds 10% as options investors set higher odds for a decline. On the other hand, in a bullish market, the skew indicator tends to be less than -10%, meaning bearish put options are discounted.

The 60-day delta skew has been near zero since Oct 26, indicating that options traders were offering similar risk and offering downside protection. However, the indicator quickly crossed the positive 10 threshold on Nov. 8 as investors began to panic. Currently he’s 24 levels which is very high and shows how uncomfortable professional traders are offering his protection on the downside.

These two derivatives indicators suggest that the Ether price plunge on Nov. 8 was quite unexpected, with whales and market makers quickly changing their stance after the loss of support at $1,400. I was.

It may take some time for investors to digest the potential regulatory and contagion risks posed by the demise of FTX and Alameda Research. As a result, a sharp and rapid recovery for Ether seems far and unlikely in the short term.