Sign in

Ethereum is approaching US$2,000. Will the popular derivatives market lead to excessive leverage?

According to statistics, the cryptocurrency with the second largest market value exceeded US$1,900, setting another record high. At the same time, the Ethereum derivatives market is extremely popular, which means that the volatility of the market will increase in the short term.

The encrypted data website shows that in the derivatives market, the average “funding rate” for major exchanges that provide Ethereum perpetual contracts (futures with no expiration date) services has risen sharply from 0.069%.

NGKEX

The funding rate refers to the regular fee required to long or short traders based on the price difference between the perpetual contract market price and the spot price. When the market trend is bullish, the funding rate is positive, the longs will pay the funding rate to the shorts.

The funding rate is calculated every eight hours, and it represents the cost of holding a long position. When the transaction price of perpetual bonds is higher than the spot price, the funding rate is positive (longs pay shorts). Therefore, a high funding rate is considered a sign of excessive leverage towards bullishness (under the overbought conditions) and often causes market volatility.

NGKEX

In this case, holding long positions at high costs is only attractive if the bullish momentum remains strong. A pullback may trigger the liquidation of long positions, leading to further price declines and a rebound in the price volatility. However, the possibility of a sustained sharp rebound is slim because the spot market trading volume on major exchanges such as Coinbase is declining.

As the average of trading volume moves downward every 10 days, there is a question mark about the sustainability of the recent rise. The decrement is usually short-lived. However, because the indicators on the chain are bullish, if there is a callback, the degree of the callback may be low. However, data shows that in the past three months, the number of tokens held on exchanges has fallen by 10% to 20.77 million. It shows that investors either directly keep the tokens or invest them to a decentralized financial agreement, which causes a shortage of sellers’ liquidity.

NGKEX

In the long run, if the amount of Ethereum holdings in all exchanges decreases, the upward trend of Ethereum will continue. This is because the higher the usage rate, the greater the demand for cryptocurrencies, which drives up prices. The price of NGK tokens continues to rise for the same reason. As we all know, the NGK currently has Dapps, liquidity mining, computing power market, and the NGKEX. As the value transfer center, the utilization rate of NGK is currently increasing, which leads to an increasing demand for NGK. The total amount of NGK is constant, so the price of NGK will inevitably rise.