The price of Ether (ETH) has risen 60% since May 3, outperforming the leading cryptocurrency Bitcoin (BTC) by 32% over the period. However, evidence suggests that the current $1,600 support lacks strength as network usage and smart contract deposit rates have weakened. Moreover, ETH derivatives are showing increasing pressure from margin traders.

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The positive price movement was primarily driven by growing confidence in the transition of the “Ethereum merger” to a Proof-of-Stake (PoS) consensus network in September. During the Ethereum core developer conference call on July 14, developer Tim Beiko suggested September 19 as a tentative date. In addition, analysts expect new ETH supply to drop by 90% following the change in the network’s monetary policy, which will be a bullish catalyst.

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The total value of Ethereum locked up (TVL) rose significantly due to the collapse of the Terra ecosystem in mid-May. Investors have moved their decentralized finance (DeFi) deposits to the Ethereum network thanks to its strong security and battle-tested applications, including MakerDAO (MKR), the project behind the DAI stablecoin.

The total cost is locked by market share. Source: Defi Lama
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The Ethereum network currently holds 59% of the TVL market, up from 51% on May 3rd. data by Defi Lama. Despite the share increase, $40 billion of current Ethereum deposits on smart contracts seem small compared to $100 billion in December 2021.

Demand to use decentralized applications (DApps) on Ethereum seems to have weakened given the average transfer fee or gas cost, which is currently $0.90. This is a sharp drop from May 3, when network transaction costs averaged over $7.50. However, it can be argued that the increased use of Tier 2 solutions such as Polygon and Arbitrum is the reason behind the lower gas fees.

Option traders are neutral, leaving the “fear” zone.

To understand how whales and market makers are positioned, traders should take a look at the Ethereum derivatives market data. In this sense, a 25% delta skew is a tell-tale sign whenever professional traders overprice upside or downside protection.

If investors expect the price of Ether to rise, the skew indicator will move to -12% or lower, reflecting the general excitement. On the other hand, a skew above 12% shows a reluctance to use the bearish strategies typical of bear markets.

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

For reference, the higher the index, the less likely traders are to assess downside risk. As shown above, the skew indicator came out of its “fear” mode on July 16 when ETH broke the $1,300 resistance. Thus, these option traders no longer have a higher chance of a market downturn as the skew remains below 12%.

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Margin traders cut their bullish bets

To confirm whether these movements were limited to a particular option instrument, leveraged markets should be analyzed. Lending allows investors to use their positions to buy more cryptocurrencies. When these savvy traders enter long margin positions, their profits (and potential losses) depend on the rise in the price of Ether.

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

Bitfinex ETH Margined Positions. Source: Coinglass

On July 2, Ethereum Long Margin peaked at 500,000 ETH, the highest level since November 2021. However, the data shows that these savvy traders have reduced their bullish bets as the price of ETH has recovered some of its losses. The data shows no evidence that Bitfinex margin traders expect a 65% correction from May to below $1,000 in mid-June.

Options risk metrics show that professional traders are less wary of a potential crash, but at the same time, margin market players are turning bullish positions as ETH price attempts to establish support at $1,600.

It appears that investors will continue to monitor the impact of nominal TVL deposits and demand for smart contracts on grid gas fees before placing further bullish bets.

The views and opinions expressed here are solely those of author and do not necessarily represent the views of Cryptooshala. Every investment and trading move involves risk. You should do your own research when making a decision.