Does ether sudden drop to $2K imply that the market’s bullish momentum has ended?

The price of ether fell 14% as the whole cryptocurrency market fell, but there may be a bright spot according to statistics from derivatives. On January 3, the ether (ETH) price fell from $2,380 to $2,050 in less than two hours, resulting in a significant 14% correction. Since Dec. 1, 2023, this price level has not been reached. As a result of the sudden volatility, $100 million worth of ETH’s long future contracts leveraged bets on price increases were liquidated.

After three failed attempts in the last month to break above $2,400, traders are now wondering what the meaning of this price pullback is and if it indicates the end of the bullish trend.  

It’s difficult to argue that the positive trend has ended because this was also Ether’s third price decline below $2,150 in the same time frame.

Market Dynamics and Speculation Surrounding Bitcoin ETF Approval

The quick recovery to $2,230 on January 3 is the first striking finding from the price chart, indicating that whatever caused the panic selling and derivatives liquidations has weakened. Some claim that this triggered a market study issued by Matrixport on January 3rd, which pointed to the rejection of the spot Bitcoin ETF. Interestingly, Jihan Wu best known for his wildly profitable endeavor in the ASIC mining market at Bitmain co-founded the digital assets platform Matrixport.

Above all, investors are taking into consideration the most recent remarks made by Bloomberg’s senior ETF analyst, Eric Balchunas. According to Balchunas, approval odds are still 90% in a Cointelegraph interview.  

He emphasized, though, that the U.S. Securities and Exchange Commission’s conclusion might take longer to make. Essentially, the markets have overreacted in two ways: they have shown undue faith in the Jan. 10 deadline and have failed to distinguish between the opinions of Matrixport analysts and real news and events.

In a social media post, lawyer and commercial litigator Joe Carlasare succinctly described the circumstances.

 Carlasare claimed that “the market was overbought,” a reference to buyers who were abusing leverage and turning bulls into easy pickings for market makers and whales. An examination of the ETH monthly futures annualized premium, which in robust markets should normally fall between 5% and 10%, leads to this conclusion.

Navigating the Future of ether Market Volatility

The statistics show an increasing demand for leveraged ETH long positions, with the futures contract premium rising from 11% on December 18, 2023, to 27% on January 2, 2024. Keeping such holdings for prolonged periods, however, became pricey for buyers. This increase in the metric followed a 15% increase in the price of ETH during that period.

The last time ether bulls suffered such a large loss in the futures markets was on August 17, 2023, when $170 million in long positions liquidated. ETH experienced a similar intraday 15% correction, plunging from $1,800 to $1,530, but soon recovered to $1,680 within two hours. However, the price recovery did not last in the medium term, as ETH returned to the $1,530 low on September 11, 2023.

To further understand the risk of whales and arbitrage desks employing derivatives, one must examine the volume of ether options. We can estimate the current bullish or bearish mood by evaluating the put (sell) and call (buy) options.

Except for a brief period on December 19, 2023, ETH put options have constantly lagged behind call options in terms of volume by a factor of two. This shows a decrease in demand for protective solutions, confirming the confidence and overconfidence seen in Ether futures markets.

The cause of the 14% flash crash on January 3 may never known for certain. However, based on the markets for Ether futures, it appears that investors got overconfident and relied primarily on excessive leverage. This does not inherently invalidate Ether’s bull run, nor does it make advances over the $2,400 resistance less likely in the run-up to the ETF decision. Data suggests that the market is in better shape, at least in terms of derivatives.