Ethereum futures prices are hovering well below spot prices, suggesting that while traders expect Ether (ETH) to rise after The Merge, investors need to be wary of downside risks.
The question here is whether ETH can really keep strong momentum before and after conducting The Merge.
The Merge is an important upgrade event of the Ethereum network. Blockchain will move from Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS). The goal of Ethereum is to enhance scalability, security, and sustainability.
ETH’s impressive gains over the past 30 days have exceeded the expectations of even the most optimistic investors. The buying phase is expected to turn the $1,900 mark into a support zone. However, derivatives indicators and other data show that professional traders are still skeptical about the market.
Notably, in the past period, the price of Bitcoin (BTC), the leading large-cap token, also increased by 28%. Therefore, it is clear that ETH’s strong rally was fueled by The Merge event.
Goerli is the ultimate testnet integrated to complete The Merge. The process of The Merge on Goerli ended smoothly at 8:45 am on August 11. The mainnet switch event has been set for September 15th.
Investors have reason to believe in this landmark transition. Such a multi-stage upgrade will make Ethereum more scalable and cost-effective thanks to its sharding and sharding mechanism.
However, The Merge’s biggest change is to completely remove the old PoW mining mechanism that consumes a lot of energy. The Merge has not yet addressed the limit of data that can be validated and inserted into each block.
For that reason, the analysis of derivatives data will help answer the level of investor optimism in ETH and whether the rally can lead to the $2,000 mark or higher.
The spread of ETH futures from 1/8
Retail traders often avoid quarterly futures trading due to the premium to the spot market. However, they are preferred by professional traders as they limit the risk of volatility in contract settlement fees.
These fixed contracts are often traded at a lower premium than the spot market because investors need more money to maintain liquidity. Therefore, futures should trade with annual premiums ranging from 4-8% in healthy markets.
Premium on ETH futures started to fall into the negative territory on August 1, indicating that a lot of people believe the price will fall. This situation is called backwardation, a red flag.
Premium varies depending on the price difference between the futures contract and the spot contract. The higher the futures trading price is, the higher the premium will be. On the contrary, a low premium shows that the difference between the two prices is not much.
According to Roshun Patel, former Vice President of Genesis Trading, this is likely because traders try to offset the risk of rising spot prices by taking a bearish position on futures contracts.
To eliminate external factors, traders also need to analyze the ETH options market. A 25% deviation, for example, shows that market makers and arbitrageurs are overcharging to protect gains or losses.
During a bull market, options traders offer higher odds for a price pump, causing the deviation indicator to drop below -12%. On the other hand, the overall market fear creates a positive deviation of 12% or higher.
The 30-day deviation bottomed out at -4% on July 18, the lowest level since October 2021. Such numbers show that traders are not willing to take risks when using ETH options.
Even the recent 85% increase has failed to build confidence among professional investors. It is clear that there are still many doubts surrounding ETH’s future uptrend. For now, only one thing is certain: investors expect to receive free tokens after the PoS transition.