Author: Marcel Pechman, CoinTelegraph; Translation: Wuzhu, Golden Finance

On November 12, the price of ETH soared to $3,444, hitting the highest level since July. This rebound came after Bitcoin hit a new all-time high of $89,957, adjusting to $87,000 on November 12. Traders are now questioning whether the excessive leverage in Ethereum futures will increase the risk of ETH falling below $3,200.

Ethereum 8-hour funding rate. Source: Laevitas.ch

Perpetual futures, also known as inverse swaps, have embedded fees to balance excessive leverage demand. When market sentiment is overly optimistic, the funding rate becomes positive. However, a monthly rate as high as 2.1% is considered neutral, as crypto traders tend to be naturally optimistic.

On November 12, Ethereum's funding rate skyrocketed to 6.1% per month, the highest level in eight months. This high level is unlikely to be sustained for long, as the holding costs for long positions become unsustainable, incentivizing short positions to sell to earn the funding rate. However, during a bull market, the funding rate may remain exceptionally high for weeks.

Early 2024 Ethereum 8-hour funding rate. Source: Laevitas.ch

In the first half of March 2024, Ethereum's funding rate remained at 2.5% per month or higher. Despite the cost of holding leveraged long positions peaking at 11% per month, for traders holding positions for about two weeks, these levels are not high. Additionally, traders can explore other funding options.

Monthly Ethereum futures contracts offer fixed premiums, known before purchase, while perpetual contract funding rates are variable. If the funding rate remains high, traders can easily switch to this tool. Other alternatives include margin trading, where traders can borrow stablecoins to buy more Ethereum in the spot market.

Is the Ethereum derivatives market overheated?

To evaluate whether Ethereum traders are too optimistic, it is also important to analyze the Ethereum options market. When arbitrage desks and market makers charge excessive downside protection fees, the 25% delta skew indicator usually rises above 6%. Conversely, periods of market excitement typically lead to a -6% delta skew.

Deribit's Ether 30-day options skew (put-call). Source: laevitas.ch

Data shows that Ethereum investors remain neutral as the skew indicator has not fallen below the -6% threshold. This indicates that the temporary surge in leveraged Ethereum futures demand does not reflect broader market sentiment. If optimism becomes more widespread, people might consider the risks posed by a 6.1% monthly funding rate, but that is not the case at present.

However, these derivative indicators could create an ideal scenario for further appreciation of the Ethereum price. With Ethereum's price rising over the weekend, traders may be caught off guard and lack sufficient resources to increase their positions, indicating a temporary imbalance in leverage.

From November 6th to November 11th, the net inflow of 0.513 billion USD in Ethereum exchange-traded funds (ETFs) in the United States highlighted the strong and healthy demand in the spot market, contrasting sharply with the excessive demand for derivatives.

In other words, if the Ethereum price were to return to $3,070 without signs of imminent cascading liquidation risks, this would result in an 11% drop from the high of $3,444 on November 12th.