27 Jan 2021 #Ethereum
After dropping 27% over three days, Ether (ETH) price finally reached a bottom at $1,040 on Jan. 22. The sharp correction liquidated $600 billion worth of future contracts but interestingly, Ether price rebounded to a new all-time high even as Bitcoin price continues to trade in a slight downtrend.
According to Cointelegraph, the increasing TVL and transaction volumes of the decentralized finance sector are behind Ether’s impressive surge. To determine whether the recent pump reflects a potential local top, we’ll take a closer look at on-chain flows and derivatives data.
Increasing withdrawals from exchanges can be caused by multiple factors, including staking, yield farming, and buyers sending coins to cold storage. Usually, a steady flow of net deposits indicate a willingness to sell in the short-term. On the other hand, net withdrawals are generally related to periods of whale accumulation.
By measuring the expense gap between futures and the regular spot market, a trader can gauge the level of bullishness in the market. The 3-month futures should usually trade with a 6% to 20% annualized premium (basis) versus regular spot exchanges. Whenever this indicator fades or turns negative, this is an alarming red flag. This situation is known as backwardation and indicates that the market is turning bearish. On the other hand, a sustainable basis above 20% signals excessive leverage from buyers, creating the potential for massive liquidations and eventual market crashes.
The premium peaked at 6.5% on Jan. 19, equal to a 38% annualized rate. This level is considered extremely overbought, as traders need an even higher price increase ahead of expiration to profit from it.
In addition to monitoring futures contracts, profitable traders also track volume in the spot market. Typically, low volumes indicate a lack of confidence. Therefore significant price increases should be accompanied by robust trading activity.
Over the past week, Ether has averaged $6.1 billion in daily volume, and while this figure is far from the $12.3 billion all-time high seen on Jan. 11, it is still 240% higher than December’s. Therefore, the activity supporting the recent $1,477 all-time high is a positive indicator.
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