Ethereum futures open interest surges to highest level in 19 months as ETH price struggles

Ether’s price experienced a notable 10% correction between July 31 and Aug. 2, revisiting the $3,000 support level for the first time since July 8. This movement surpassed the broader cryptocurrency market decline of 6.8% during the same period. Despite this, Ether futures’ open interest surged to its highest point in seven months, prompting traders to ponder whether a potential rally to $3,600 is on the horizon.

The uptick in Ether futures activity does not necessarily signal a bullish sentiment. Typically, heightened interest in ETH futures contracts reflects institutional investors’ engagement, as open interest gauges leverage demand. However, it’s important to note that for every buyer (long) in the market, there is a seller (short), so an increase in open interest doesn’t automatically imply a positive market outlook.

A contributing factor to Ether’s decline could be linked to the limited net inflows into recently launched Ether exchange-traded funds (ETFs) in the United States. While some inflows were observed, particularly in BlackRock’s iShares Ethereum Trust (ETHA) and Fidelity Ethereum Fund (FETH), these were offset by outflows from the pre-existing Grayscale Ethereum Trust (ETHE) post ETF conversion.

The drop in Ether’s price below $3,000 triggered approximately $141 million in leveraged long liquidations within a 48-hour period, further intensifying the correction. Nonetheless, this didn’t deter other traders from entering the market, irrespective of their position on Ether’s price direction. Consequently, the total open interest in Ether futures surged by 5% over seven days, hitting ETH 4.6 million, marking the highest level since January 2023.

Analyzing how ETH futures monthly contracts are priced compared to regular spot exchanges can provide insights into whether buyers are seeking more leverage. In neutral markets, these derivatives should trade 5% to 10% higher, annualized, to account for the extended settlement period. A dip below this range could indicate a bearish sentiment among traders.

Leading up to the spot ETF launch on July 23, Ether monthly futures contracts displayed modest optimism, with the futures premium peaking at 12%. However, subsequent net outflows from spot ETFs and a broader crypto market downturn caused the index to recede to 8% by Aug. 2, a level considered neutral but not unexpected given the 10% price drop within 24 hours.

Assessing the leverage demand for retail traders in Ether futures involves examining the perpetual contract (inverse swap) funding rate. Unlike monthly contracts, these instruments closely mirror the spot price due to their shorter settlement periods. In neutral markets, the 8-hour funding rate typically ranges from zero to 0.016%, or 1.3% per month, with potential spikes during periods of heightened market optimism.

The Ether 8-hour funding rate has remained relatively steady at 0.008%, equivalent to 0.7% per month, well within the neutral range in recent days. This stability suggests that retail traders weren’t heavily reliant on excessive leverage prior to Ether’s unexpected price dip to $3,000.

The surge in Ether futures open interest is likely primarily driven by the cash-and-carry trade, a neutral arbitrage strategy where investors sell futures contracts to capture premiums while hedging risk by purchasing the spot or ETF. Consequently, based on ETH derivatives metrics, there’s currently no clear indication that traders are anticipating a short-term price surge.