Ethereum Futures Premium Hits 3-Month Low: Is ETH Undervalued?

The Potential of Ether (ETH) and the Differences Between Web 1.0, 2.0, and 3.0

Despite a recent drop of 12.5%, investors in Ether (ETH) may find solace in a closer examination of the asset’s data. While macroeconomic factors may have played a role in the correction, the futures premium for Ether has hit a three-month low, leading some traders to speculate about other pressures on the price of ETH.

One potential source of hope for ETH lies in the concept of Web 3.0, championed by Tim Berners-Lee. This next generation of the internet promises a decentralized structure, in stark contrast to the centralized nature of Web 1.0 and the limited interactivity of Web 2.0. This shift towards decentralization is mirrored in the world of cryptocurrency, with projects like ETH leading the charge towards a more open and democratized financial system.

While Web 1.0 was characterized by static websites and Web 2.0 introduced more user-generated content and social media, Web 3.0 is set to revolutionize the way we interact with the internet by utilizing blockchain technology and decentralization. This fundamental difference between Web 3.0 and its predecessors is also reflected in the world of crypto, where the concept of decentralization is a core tenet of many projects and serves as a key differentiator from traditional financial systems.

In terms of funding, crypto has seen a surge in popularity and support, with platforms like Reddit serving as a hub for discussion and information sharing. This grassroots approach to funding and community building is a key aspect of the crypto world, setting it apart from traditional sources of funding and investment.

The upcoming Ethereum Dencun upgrade has the potential to revive positive price momentum for the network. High gas fees on Ethereum have been a major concern for traders and investors, leading to competition from other blockchains such as BNB Chain, Solana, and Avalanche, which focus on scalability. Despite differences in decentralization, layer-1 solutions generally offer a more convenient user experience. As a result, the cost of scalability solutions on Ethereum is a crucial factor. On February 1, Ethereum core developer Tim Beiko announced the successful testing of the upcoming Dencun hard fork. This upgrade will introduce proto-danksharding, which aims to reduce the costs of rollup scalability solutions. While no official deadline has been announced by the Ethereum Foundation, analysts expect the mainnet to activate by March. The importance of layer-2 solutions is evident in the TVL (total value locked) of the top four networks – Arbitrum, Optimism, Manta, and Base – which currently stands at $4.2 billion. This surpasses BNB Chain’s $3.5 billion in smart contract deposits, according to DefiLlama. Additionally, in the past week, Ethereum rollups have processed 4.2 times more transactions per day compared to the mainnet, as reported by L2Beat. This highlights the significant difference in usage between layer-2 solutions and the mainnet. In conclusion, the Dencun upgrade and the adoption of layer-2 solutions have the potential to address the high gas fees on Ethereum and improve the network’s overall user experience. This could lead to a resurgence in positive price momentum for the network.

The demand for bullish ETH leverage positions has decreased

Experienced traders prefer monthly futures contracts as they do not have a funding rate. In neutral markets, these contracts are typically priced at a premium of 5% to 10% to account for their longer settlement period.

Data shows that the premium on ETH futures has been declining since Jan. 2, but it remained above 10% until Jan. 23. Interestingly, despite reaching a peak of $2,715 on Jan. 12 due to the excitement surrounding the launch of a spot Bitcoin (BTC) exchange-traded fund (ETF), the price of Ether only dropped by 2.2% between Jan. 2 and Feb. 2. This current 7% premium on ETH futures can be attributed to exaggerated price expectations in the cryptocurrency market.

For comparison, the last time the premium on Ether’s futures was at 7% was on Nov. 4, 2023, when the price of ETH was $1,860. Additionally, historical data shows that there were 110 days of trading below the $1,900 resistance level, indicating a lack of confidence at that time. However, those who were brave enough to place bullish bets in November 2023 saw the price of Ether rise 21.5% from $1,850 to $2,250 within 30 days. Therefore, the decrease in bullish leverage positions does not necessarily mean that a negative price swing is imminent.

The emergence of Web 3.0 and its impact on Ether option markets

To better understand the current state of Ether futures, it is important to look at options markets and exclude any external factors. The 25% delta skew is a useful metric for assessing investor sentiment and can indicate whether the recent rejection at $2,600 on Jan. 11 has affected optimism. A skew above 7% typically suggests a bearish outlook, while a -7% skew is associated with bullishness.

Interestingly, the Ether options skew briefly reached the bullish -7% threshold on Jan. 31 before quickly returning to a neutral level. This trend has been consistent since Dec. 4, 2023, when Ether’s price surged from $1,560 to $2,250 in just seven weeks. Therefore, the current neutral options indicator should not be interpreted as a lack of faith in Ether’s potential, but rather a reflection of uncertainty in the market.

Ether bulls are eagerly awaiting the potential approval of a spot Ether ETF, which could have a significant impact on the market. The U.S. Securities and Exchange Commission recently delayed its decision on BlackRock’s proposal, with Bloomberg ETF analyst Eric Balchunas predicting a final decision by May 23 and placing approval odds at 70%. Given this potential catalyst and past examples, the decline in Ether’s futures premium to 7% should not be seen as a bearish signal.