The price of Ether (ETH) has weakened after failing to surpass the $1,950 resistance on April 26. The subsequent correction led to a drop in ETH’s price to $1,810 on May 1, nearing its lowest level in four weeks. Interestingly, this movement happened around the same time that the First Republic Bank (FRB) was seized by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corporation (FDIC) entered into a purchase and assumption agreement with JPMorgan to protect FRB depositors, estimating a $13 billion loss.
Economic Environment and Derivatives Metrics
The VIX indicator, which measures how traders price the risks of extreme price oscillations for the S&P 500 index, reached its lowest level in 18 months on May 1. However, overconfidence is the main driver for surprise moves and large liquidations in derivatives markets, meaning low volatility does not necessarily precede periods of price stability.
The economic environment has worsened significantly after the U.S. reported first-quarter gross domestic product (GDP) growth of 1.1%, below the 2% market consensus. Meanwhile, inflation in Germany remained exceptionally high at 7.6% year-over-year in April. Investors are now pricing higher odds of a global recession as the U.S. Federal Reserve is expected to raise interest rates above 5% on May 3.
In such a situation, Ethereum derivatives metrics can tell us about professional traders’ risk appetite. Ether quarterly futures are popular among whales and arbitrage desks, and they typically trade at a slight premium to spot markets. Futures contracts on healthy markets should trade at a 5% to 10% annualized premium – a situation known as contango – which is not unique to crypto markets. Since April 19, the Ether futures premium has been stuck near 2%, indicating that professional traders are unwilling to flip neutral despite ETH’s price testing $1,950 resistance on April 26.
Options Markets and Skew Ratio
The absence of demand for leverage longs does not always imply a price decline. Traders should investigate Ether’s options markets to learn how whales and market makers value the likelihood of future price movements. The 25% delta skew indicates when market makers and arbitrage desks overcharge for upside or downside protection. In bear markets, options traders increase their odds of a price drop, causing the skew indicator to rise above 8%. Bullish markets tend to drive the skew metric below 8%, indicating that bearish put options are in less demand.
The 25% skew ratio is currently at 1 as protective put options are trading in line with the neutral-to-bullish calls. This is a bullish indicator given the six-day 7.8% correction since ETH’s price failed to break the $1,950 resistance. So far, Ether’s price has failed to display strength, while the banking sector created a giant opportunity for decentralized financial systems to showcase their transparency and resilience versus traditional markets. However, derivatives metrics show no sign of extreme fear or leveraged bearish bets, indicating low odds of retesting the $1,600 support in the near term.
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