Traditional markets have an old saying that is more of a trading rule than a traditional market rule. The saying goes that “when the trend becomes negative, one cannot be neutral or short,” which means you can only bet on the price falling. A relief bounce can trick traders into thinking that the buyers’ market has changed from a negative prevailing sentiment.
If one looks at Ether’s (ETH), price chart, one could conclude that after a 41% drop, a bull market should be started sooner than later. This is unfortunately a false assumption. Markets can exist during periods of non-definition (trendwise).
Price of Ether at FTX in USD Source: TradingView
The above chart could be interpreted as displaying a long period trading range near $2,800. Normal should be considered given Ether’s 88% annualized volatility. Therefore, movements between $2,400 & $3,200 can be considered normal.
Technical analysis might show that a trader points to lower highs in the channel’s downtrend channel. But should Ether bears rejoice and demand $2,500 or less? This will depend on the position of retail traders and on-chain metrics.
It is worth asking yourself if the 63% decrease in network transaction fees to $17 represents a decrease in use of decentralized apps (DApps) or if users are benefiting from using other layer-2 scaling solutions.
The futures premium for Ether is absent
The perpetual contracts futures data can be used to determine how confident traders are regarding Ether’s price recovery. Because of its 50x leverage and price that closely matches the regular spot market, this is the preferred derivative for retail traders.
Futures contracts trades have both buyers and sellers. However, their leverage can change. Exchanges will charge a funding fee to the side that has deposited less margin. The opposing side is also charged this fee.
Ether perpetual futures 8 hour funding rate Source: Coinglass
This data shows us whether retail traders get excited and cause the funding rate to rise above 0.05% (equivalent to 1% per semaine). The past few months have shown a slight negative funding rate. This is indicative of a neutral-to bearish sentiment. There is currently no indication that retail traders feel confident enough to purchase Ether with leverage.
Analyzing the Ethereum network’s onchain data is a good way to exclude externalities from influencing derivatives data. Monitoring the network usage can tell us whether the actual use cases support the demand of Ether tokens.
On-chain metrics raise concern
It is a reliable and quick indicator of effectiveness by measuring the Ether value that has been transferred on the network. This metric can be manipulated by layer-2 solutions to increase adoption, but it serves as a good starting point.
USD. 7-day average per day native ETH token transfer, USD. Source: CoinMetrics
Although the $6.7 billion daily average transaction is up 6% from 30 days ago, it’s still not as high as the $9 billion that was seen in late-2021. Data indicates that Ether token transactions have not shown any signs of growth on at least the primary layer.
You should continue to analyze decentralized applications usage metrics but not solely focus on Total Value Locked (TVL). TVL is heavily focused on lending platforms (DEX), so it is better to gauge the number of active addresses.
Dapps activity for Ethereum network 30 days. Source: DappRadar
Average monthly Ethereum DApps saw a 10% drop in active addresses. The data is disappointing as the smart contract network was designed to host decentralized applications like non-fungible token marketplaces (NFT) and decentralized finance, DeFi.
Bears will likely have the upper hand unless there is significant growth in Ether transactions or DApps usage. Retail traders’ neutral funding rates should not be interpreted as a sign of weakness, since these investors tend to enter long-leveraged positions after a strong rally in the price.
Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.