Ether (ETH) experienced a significant 14% drop in price on January 3rd, going from $2,380 to $2,050 in less than two hours. This price level had not been seen since December 1st, 2023, and the unexpected decline resulted in the liquidation of $100 million worth of ETH long future contracts, which were leveraged bets on a price increase.
Traders are now questioning the significance of this price correction and whether it indicates the end of the bullish momentum that has been building up over the past month. In the past month, there have been three unsuccessful attempts to break above the $2,400 mark. Interestingly, during the same period, Ether’s price dropped below $2,150 for the third time, making it difficult to argue that the bullish momentum has come to an end.
One noteworthy observation from the price chart is the quick recovery to $2,230 on January 3rd. This suggests that whatever triggered the panic selling and derivatives liquidations has weakened. Some speculate that the trigger was a market analysis released on January 3rd, which pointed to the denial of the spot Bitcoin ETF. This analysis was published by Matrixport, a digital assets platform co-founded by Jihan Wu, who is known for his success in the ASIC miner business at Bitmain.
Investors are also considering the latest comments from Bloomberg’s senior ETF analyst, Eric Balchunas. In an interview with Cointelegraph, Balchunas stated that the approval odds for a Bitcoin ETF remain at 90%. However, he also mentioned that it might take longer for the final decision from the U.S. Securities and Exchange Commission to be reached. The market has reacted excessively in both directions, showing excessive confidence in the January 10th deadline and failing to distinguish between Matrixport analysts’ opinions and actual news and events.
According to attorney and commercial litigator Joe Carlasare, the market was overbought, which means that buyers were using excessive leverage. This made them an easy target for whales and market makers. Carlasare came to this conclusion by analyzing the ETH monthly futures annualized premium, which should typically range between 5% and 10% in healthy markets.
The data shows a growing demand for leveraged ETH long positions, as the futures contract premium surged from 11% on December 18th, 2023, to 27% on January 2nd, 2024. However, sustaining these positions for longer periods became costly for buyers. This surge in the metric followed a 15% rally in ETH’s price during that period.
The last time Ether bulls experienced such a significant loss in the futures markets was on August 17th, 2023, when $170 million worth of long positions were liquidated. The price dropped by 15% in that intraday correction, but quickly rebounded within two hours. However, the price recovery did not hold in the medium term, as ETH revisited the bottom shortly after.
To understand the exposure of whales and arbitrage desks using derivatives, it is important to assess Ether options volume. By examining the put (sell) and call (buy) options, we can gauge the prevailing bullish or bearish sentiment.
Except for a brief period on December 19th, 2023, ETH put options have consistently lagged behind call options in terms of volume, approximately by a factor of two. This suggests reduced demand for protective strategies, reinforcing the confidence and excessive optimism observed in the Ether futures markets.
The exact cause of the 14% flash crash on January 3rd may never be definitively determined. However, judging by Ether derivatives markets, it seems that investors became overconfident and heavily relied on excessive leverage. This does not necessarily invalidate Ether’s bullish run or make gains above the $2,400 resistance less likely before the ETF decision. From a derivatives perspective, the market appears to be healthier.
This article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.