Ethereum Futures Market Cool Off Sets Stage For ETH To Rally: Quant

An analyst has explained that the latest cooldown in the Ethereum futures market could suggest there is potential for a price rise to resume for ETH.

An analyst in a CryptoQuant Quicktake post explained that the ETH funding rates have seen a cooldown from their previously overheated levels. The “funding rate” refers to the periodic fees that futures contract holders on derivative platforms currently exchange with each other.

When the value of this metric is positive, it means that the long contract holders are paying a premium to the shorts to hold onto their positions. Such a trend implies that most traders share a bullish sentiment right now.

On the other hand, the under zero indicates that a bearish sentiment is currently dominant in the futures market, as the short traders are overwhelming the longs.

Now, here is a chart that shows the trend in the Ethereum funding rates over the last few months:

As displayed in the above graph, the Ethereum funding rates have been mostly positive during the last few months, implying that traders on the futures side of the market have mostly been bullish about the asset.

The few times that the metric did dip into the negative inside this period didn’t turn out to be anything major, as the indicator only attained low red values and rebounded back inside the green territory without too much wait.

The chart shows that during some phases of this lasting period of bullish sentiment, the metric attained particularly high values. “However, it’s crucial to note that elevated values in funding rates raise concerns about a potential overheated state in the perpetual markets, signaling the possibility of an impending long-squeeze event,” notes the quant.

A “squeeze” is an event in which a sharp swing in the price triggers a large number of liquidations, which in turn feed into this price move, elongating it and causing further liquidations.

When such a cascade of liquidations affects the long side of the market (that is, the price move in question is a rapid drawdown), the event is known as a “long squeeze.”

Generally, the side of the futures market most heavily dominated by traders is likelier to fall prey to a squeeze. Thus, when the funding rates are highly positive, a long squeeze can be more probable.

Recently, though, as Ethereum has gone through its latest correction, so have the funding rates. Although they are still positive, their magnitude may no longer be associated with an overheated market, and the risk of a long squeeze would have thus fallen.

“Consequently, there exists the potential for the price to resume its upward trajectory following the completion of the ongoing correction stage,” explains the analyst.

Ethereum has declined by around 5% during the past week as its price has now fallen under $2,400.