Ethereum bulls ignore regulatory measures against exchanges by preparing for Shapella hard fork
Over the past twelve days, the price of Ether (ETH) has traded in a narrowly declining range. Surprisingly, even the news that Binance and Changpeng “CZ” Zhao were sued by the Commodity Futures Trading Commission (CFTC) was not enough to break the support level.
The lawsuit, filed on March 27, alleged that Binance provided derivatives trading services to US-based clients without first obtaining a derivatives license. In addition, the US Securities and Exchange Commission served Coinbase with a Wells notice on March 22.
Although traders saw no reason to reduce their Ether positions due to increased regulatory risk, Binance has 35% of the open interest in Ether futures. Therefore, if traders are suddenly forced to liquidate their positions or if there is a sudden reduction in liquidity after US entities are effectively banned from Binance’s markets, a significant impact on the Ether derivative markets should be anticipated.
One can point to the market’s resilience after the BitMEX derivatives exchange lost its long-held market share advantage following a 30-minute outage in March 2020 during a Bitcoin crash. However, there is no way to predict the outcome of the regulators’ case against Binance, so it would be naïve to assume there is a zero percent chance of a service outage – even if it means clients can close positions and withdraw assets.
Instead of focusing solely on the ETH price, it is important to closely monitor Ether derivatives to understand how professional traders will react.
ETH derivatives show increased demand for longs
In healthy markets, the annualized two-month futures premium should trade between 5% and 10% to cover associated costs and risks. However, when the contract trades at a discount (backward) to traditional spot markets, it indicates traders’ lack of confidence and is seen as a bearish indicator.
On March 29, derivatives traders using futures contracts became slightly more bullish as the indicator moved to 4%. The futures premium hit its highest level in four weeks, despite staying below the neutral 5% threshold. These traders became even more confident that the market structure would remain stable.
The increasing demand for leverage longs (bulls) does not necessarily mean an expectation of positive price action. Accordingly, traders should analyze Ether’s options markets to understand how whales and market makers are pricing the odds of future price movements.
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Options traders are unaffected by the regulators’ actions
25% delta bias is a clear sign when market makers and arbitrage tables are overcharging for upside or downside protection.
In bear markets, option investors place higher odds on a price dump, causing the bias indicator to rise above 8%. On the other hand, bullish markets tend to drive the bias metric below -8%, meaning the bearish put options are less in demand.
The delta bias indicator has been neutral since March 22, indicating similar pricing for upside and downside options. But given that Ether’s price is nearing a seven-month high of $1,800, one would expect the protective put options to be trading at a premium – which is not the case.
Given the increased regulatory pressure on Coinbase and Binance, it is clear that the derivatives markets are signaling confidence. The bullish momentum for Ether could also be related to the Shapella fork being confirmed for April 12th. Validators will be able to withdraw their ETH coins from the Beacon Chain as soon as the Ethereum Improvement Proposal EIP-4895 becomes active.
Options and futures markets indicate that professional traders are not concerned about regulators’ actions against Binance and Coinbase. Those who believe the descending channel pattern will break to the upside have a solid claim.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are those of the authors alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
