3 key Ether derivatives metrics suggest that $1,600 ETH support is lacking strength

Ether (ETH) price is up 60% since May 3, outperforming the leading cryptocurrency Bitcoin (BTC) by 32% in that span. However, there are indications that the current $1,600 support is lacking strength as network usage and smart contract deposit metrics weakened. Additionally, ETH derivatives are showing increasing selling pressure from margin traders.

The positive price action was primarily due to growing certainty of the merger, which represents Ethereum’s transition to a Proof-of-Stake (PoS) consensus network. During the Ethereum Core developer conference call on July 14, developer Tim Beiko suggested September 19 as a tentative target date for the merger. Additionally, analysts expect the new supply of ETH to be reduced by as much as 90% following the change in monetary policy on the network, creating a bullish catalyst.

Ethereum’s Total Value Locked (TVL) has benefited greatly from the collapse of the Terra ecosystem in mid-May. Investors moved their decentralized finance (DeFi) deposits to the Ethereum network thanks to its robust security and battle-tested applications, including MakerDAO (MKR) – the project behind the DAI stablecoin.

Total value locked by market share. Source: Defi Llama

According to data from Defi Llama, the Ethereum network currently holds a 59% market share of TVL, up from 51% on May 3rd. Despite gaining shares, Ethereum’s current deposits of $40 billion on smart contracts appear small compared to December 2021’s $100 billion.

Demand for using decentralized applications (DApp) on Ethereum appears to have softened considering the median transfer fees, or gas cost, which currently stands at $0.90. That’s a sharp drop since May 3, when network transaction costs topped $7.50 on average. Still, one could argue that higher usage of layer-two solutions like Polygon and Arbitrum account for the lower gas rates.

Options traders are neutral and step out of the “fear” zone

To understand how whales and market makers are positioned, traders should look at Ether’s derivatives market data. In this sense, the 25% delta skew is a telling sign when professional traders are overcharging for upside or downside protection.

When investors expect Ether price to rally, the skew indicator moves to -12% or below, reflecting the general excitement. On the other hand, a deviation of over 12% shows the reluctance to use bullish strategies typical of bear markets.

Ether 30-day options 25% delta skew: Source: Laevitas.ch

The higher the index, the less inclined traders are to price in downside risk. As illustrated above, the skew indicator exited “fear” mode on July 16 as ETH broke the $1,300 resistance. Thus, these options traders no longer have a higher chance of a market downturn as the skew remains below 12%.

Related: Ethereum will outperform Visa with zkEVM rollups, Polygon co-founder says

Margin traders reduce their bullish bets

To confirm whether these moves were confined to the specific options instrument, one should analyze the margin markets. Lending allows investors to use their positions to buy more cryptocurrency. When these savvy traders open margin longs, their profits (and potential losses) depend on Ether’s price appreciation.

Bitfinex margin traders are known to create position contracts of 100,000 ETH or more in a very short amount of time, indicating the involvement of whales and large arbitrage desks.

Bitfinex ETH margin longs. Source: coin jar

Ether margin longs topped 500,000 ETH on July 2, the highest since November 2021. However, the data shows that these savvy traders have reduced their bullish bets as ETH price recouped some of its losses . The data shows no evidence that Bitfinex margin traders are anticipating May’s 65 percent correction to below $1,000 in mid-June.

Options risk metrics show that professional traders are less fearful of a potential crash, but at the same time, players in the margin markets have been liquidating bullish positions as ETH price attempts to establish $1,600 support.

Apparently, investors will continue to monitor the impact of notional TVL deposits and smart contract demand on grid gas fees before making any more bullish bets.

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