As Ethereum’s price rallied over the past five days, going up by 33%, data has shown that some buyers took this knowledge to conclude that using extreme leverage is now a good idea.
Things Are Looking Dangerous
Now, this isn’t really a bad thing, assuming these traders know what they’re doing, but the crypto space should be intimately aware of this development. It’s honestly pretty normal for futures contracts to gain a high premium for a short period of time.
Ether has seen itself with a continuous upward movement for some time now. However, it should be noted that it has now broken past the psychological barrier at $1,500. What this means is the asset is right on back into price discovery mode.
Massive Spike In Basis
Now, there are a few key metrics in the derivatives space one can review in order to determine whether or not the market is overly optimistic at this stage. One of these measures stands as the futures premium, typically referred to as basis. The basis itself stands as a measurement of the price gap between the regular spot price and the futures contract price of a particular asset.
Typically speaking, 3-month futures trade at anywhere from 6% to 20% annualized premium, which itself is seen as a lending rate. Through postponing settlement, sellers are capable of demanding a higher price than normal. Through this, the price difference occurs.
The futures premium for Ether is currently shooting up to past the 5.5% range, which itself is typically unsustainable. With less than 49 days left for the expiry date, set to occur on the 26th of March, 2021, the rate itself stands at 55% equivalent through an annualized basis.
Over-Leveraging Always A Great (Bad) Idea
With the sustainable basis above 20%, it’s clear that buyers are making use of an excessive amount of leverage, which itself is opening the doors for market crashes and large-scale liquidations.
When Ether broke through the $1,400 mark back on the 19th of January, a similar event happened as well. Sadly, the asset wasn’t capable of sustaining that price range, which ultimately resulted in liquidations being triggered in the futures market. Ether subsequently plunged by 27% within two days’ time as a result.
It should be noted, however, that a basis level above the 20% range isn’t exactly a warning for an upcoming crash. Instead, it shows the massive amounts of leverage futures contract buyers had so wisely given themselves. Should the market recede once more, then all bets are off, however, and the price will tumble like a cartoon character having the floor sawed out of him.