What Does Ethereum’s Flash Crash to $2K Mean for ETH’s Bullish Momentum?

Ether (ETH) Price Correction and Bullish Momentum

On Jan. 3, Ether (ETH) price saw a sharp 14% drop from $2,380 to $2,050 in less than two hours. This was the lowest price since Dec. 1, 2023, and the sudden price swing led to the liquidation of $100 million worth of ETH long future contracts, which were bets that the price would increase.

Traders are now debating the implications of this price correction and whether it suggests the end of the bullish momentum that was seen in the past month. This was the third time in the same period that Ether’s price fell below $2,150, making it hard to argue that the bullish momentum has ended.

The recovery of the price to $2,230 on Jan. 3 hints that the cause of the panic selling and derivatives liquidations has been eliminated. Some speculate that the trigger was a market analysis released on Jan. 3, which discussed the denial of the spot Bitcoin ETF by Matrixport, a digital assets platform co-founded by Jihan Wu, who is known for his ASIC miner business at Bitmain.

Investors are taking into account the comments of Eric Balchunas, a senior ETF analyst at Bloomberg. Balchunas stated in an interview with Cointelegraph that approval odds remain at 90%. However, he also said that it may take longer for the final decision from the U.S. Securities and Exchange Commission to be reached. It appears that the markets have reacted too strongly to both the Jan. 10 deadline and the Matrixport analysts’ opinions.

ETH Crypto and Futures Market Analysis

Joe Carlasare, an attorney and commercial litigator, recently shared his thoughts on the situation in a social media post. According to him, “the market was overbought,” suggesting that buyers were using excessive leverage, making them vulnerable to whales and market makers. This was evident from the ETH monthly futures annualized premium, which should usually be between 5% and 10% in healthy markets.

Data revealed a growing demand for leveraged ETH long positions, as the futures contract premium rose from 11% on Dec. 18, 2023, to 27% on Jan. 2, 2024.

Ether Derivatives Markets

To better understand the exposure of whales and arbitrage desks to derivatives, one must assess Ether options volume. By analyzing the put (sell) and call (buy) options, we can estimate the prevailing bullish or bearish sentiment.

Except for a brief period on Dec. 19, 2023, ETH put options have consistently lagged behind call options in terms of volume, approximately by a factor of two. This indicates decreased demand for protective strategies, reinforcing the confidence and excessive optimism observed in the Ether futures markets.

The cause of the 14% flash crash on Jan. 3 may never be definitively determined. However, judging by Ether derivatives markets, it appears that investors became overly confident and relied heavily on excessive leverage. This does not necessarily invalidate Ether’s crypto bull run or make gains above the $2,400 resistance less likely before the ETF decision. Data suggests that the market is healthier, at least from a derivatives perspective.