Ethereum (ETH) price saw a 14% increase from February 26 to February 28, reaching its highest point in nearly two years at $3,484. However, this surge in price coincided with a rise in the cost of bullish leverage positions, which is a cause for concern. Some investors believe that the excessive optimism, driven by fear of missing out (FOMO), has heightened the risk of cascading liquidations.
As we approach July 2022, the crypto market is abuzz with talk of upcoming developments such as decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and Web 3.0. These advancements are expected to revolutionize the crypto landscape and bring about new opportunities for investors.
Crypto has become a hot topic, with memes and discussions about it popping up everywhere. With the rise of DeFi and its potential for disrupting traditional financial systems, it’s no wonder that crypto has become a popular subject among investors. This has also led to increased funding for crypto-related projects, as seen on platforms like Yahoo Finance.
As the crypto market continues to evolve, the demand for DeFi solutions is expected to grow. This highlights the strong connection between crypto and DeFi, as well as the potential for further growth and development in this space. One such project to keep an eye on is AVA Crypto, which aims to bridge the gap between traditional finance and DeFi.
Not all Ether leverage demand is driven by risky bets
It’s important to note that not all traders seeking leverage on Ether are doing so for reckless reasons. Some may need temporary leverage while they raise funds through asset sales or waiting for deposits to clear. This is a common occurrence in the fast-paced market, even for experienced arbitrage desks, and can cause the funding rate to spike for a few days or even weeks.
Some analysts believe that the recent surge in optimism towards Ether’s price is due to the upcoming Dencun hard fork, set to take place on March 13. This upgrade will bring several improvements, including proto-danksharding which aims to reduce transaction fees on layer-2. The anticipated upgrade is expected to significantly lower the cost of data registry for Ethereum’s preferred scaling solution, rollups.
Uniswap, the leading decentralized exchange (DEX) for Ethereum, has already announced plans to launch a v4 implementation, which will likely lead to tangible benefits for users after the Dencun upgrade. Additionally, TrustlessState, an analyst on the X social network, predicts a 90% decrease in inscription costs on the network, which could further fuel the already thriving meme economy.
Regardless of one’s opinion on inscriptions or the potential of this market, their impact on network costs and uptime cannot be ignored. For example, Avalanche, a blockchain claiming to support higher scalability than Ethereum, experienced an outage on February 23 due to overwhelming demand in the mempool for inscriptions, as reported by an Ava Labs representative.
Scalability has long been a weakness for Ethereum, with the average 7-day transaction fee remaining at $4 or higher for the past four months. However, this has not deterred network deposits (TVL) from reaching their highest level since July 2022, at ETH 30.5 million.
The growth in deposits reflects the rise of new decentralized finance (DeFi) industries, such as liquid staking, with platforms like Lido, EigenLayer, and Rocket Pool gaining traction. It also highlights the success of interoperability protocols, including Summer.fi and Instadapp. In short, investors’ interest in ETH is also fueled by the increasing demand for the network’s decentralized applications.
Periodic spikes in Ether’s funding rate are not uncommon
In order to determine if excessive leverage was the driving force behind Ether’s recent surge towards $3,400, it is important to analyze the ETH derivatives market. Perpetual contracts, also known as inverse swaps, contain an embedded rate that is typically recalculated every eight hours.
A positive funding rate indicates a higher demand for leverage among long (bull) positions, while a negative rate suggests that shorts (bear) are using more leverage.
On November 9th, 2023, the Ethereum funding rate skyrocketed to over 5% per month as the price of Ether rose by 13.3%. However, the cost of leverage decreased to 2% the following day, quickly offsetting whatever caused the spike in the rate. However, extended periods of high leverage costs for longs often indicate an unhealthy level of bullishness.
The unexpected volatility on February 28th resulted in $102 million worth of forced liquidations for ETH, with longs accounting for $66 million. This also increased the leverage of existing bullish positions, as their margin was reduced due to Ether’s price plummeting to $3,180.
It is worth noting that Ether’s current funding rate of 0.06%, equivalent to 5.6% per month, is significantly higher than the previous couple of weeks. While this level may seem unsustainable, it is only a concern if it remains at this level for an extended period, possibly a few weeks.
Therefore, at the moment, ETH longs are at risk of liquidation. However, attributing the recent rally to excessive leverage would be inaccurate, as the funding rate was relatively stable until February 27th, despite Ether’s 42% increase in the previous 30 days.
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