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Analysts believe billion-dollar liquidations are less likely, despite the fact that open interest in Ethereum futures has reached a record peak of $8 billion.
The price of Ether continues to rise, with several economists predicting that it will reach $3,000 in the near future. All of this “success” occurs despite Ether (ETH) being in a bottleneck due to high fees, network congestion, and a stressful situation with miners.
With decentralised finance (DeFi) apps taking centre stage and combined trading volumes above $4 billion per day, Ether’s price has risen more than 200 percent since the beginning of the year, reaching a new all-time peak of $2,300 on April 13.
Ether’s open interest reached a historic peak of $8 billion as a result of this impressive market spike. Only two months earlier, this number represented 50% of Bitcoin’s (BTC) exchanges.
Some investors may argue that derivatives contracts pose a risk of greater corrections due to liquidations, but keep in mind that the same instrument may be used for both hedging and arbitrage.
Not every short seller is aiming for lower prices
Although the average retail trader uses perpetual futures (inverse swaps) mainly for short-term leverage trades, market makers and experienced traders are more likely to target yield.
This is typically accomplished by “cash and carry” tactics that combine option trades. As a result, investors must use other metrics, such as the funding rate, to determine if the existing open interest poses a challenge or an opportunity.
Large liquidations are common when sellers (longs) are too confident. As a result, a 7% intraday correction forces those using 15x or more leverage to exit. Despite making headlines, $1 billion orders will account for just 6% of current average value.
As shown above, Ether futures aggregate volumes will climb above $25 billion when additional volatility occurs. This data means the eventual liquidation impact might be even more negligible.
The impact of futures goes in both direction
Analysts often overlook the buy-side effect of futures contracts, especially during a bull market. Nobody blames derivatives for a 7 percent price surge, though they may have intensified the trend. This hypothesis holds particularly true given the high funding cost paid for longs. Traders should stop these periods until they are certain that the rally will proceed.
The funding rate will become positive whenever longs seek more leverage. A 0.15 percent charge for eight hours adds up to 3.2 percent per week. As a result, arbitrage desks and whales will buy Ether on standard exchanges while concurrently shorting futures contracts in order to collect the financing rate. This trade is known as “cash and carry,” and it is not affected by price movements.
Markets eventually normalize on their own
As existing futures open interest rises, it indicates that stocks are getting much healthier, encouraging bigger investors to compete in derivatives trading.
Ether’s CME listing was undeniably a watershed moment for the cryptocurrency, as shown by the $8 billion of accessible interest.
The funding levels will change itself by allowing more people on the “cash and carry” side to participate or by jobs being terminated due to high costs.
It does not always result in billion-dollar liquidations, but it does increase the likelihood of those events happening. Nonetheless, these same contracts may have been used to pump up the price of Ether, thus offsetting the effect over time.