Ethereum’s Flash Crash to $2K: A Momentary Setback or End of Bullish Momentum?
Ethereum (ETH) experienced a significant setback on January 3rd, with its price plummeting by 14%, dropping from $2,380 to $2,050 in less than two hours. This sudden drop, the likes of which hadn’t been seen since December 1, 2023, resulted in the liquidation of $100 million worth of ETH long future contracts, primarily leveraged bets on price increases.
Investors and traders are now pondering the implications of this sharp correction. Does it signify the end of the bullish momentum that has been building, especially after three failed attempts to breach the $2,400 resistance level over the past month? Notably, this was also the third instance during this period that Ethereum’s price dipped below $2,150, making it challenging to assert that bullish momentum has completely dissipated.
One notable aspect of this price correction is the swift recovery to $2,230 on the same day, indicating that whatever triggered the panic selling and derivatives liquidations has somewhat abated. Some attribute this sudden drop to a market analysis released on January 3rd, which predicted the rejection of a spot Bitcoin ETF. However, it’s crucial to note that this analysis was published by Matrixport, a digital assets platform co-founded by Jihan Wu, known for his successful ventures in the ASIC miner business at Bitmain.
Furthermore, investors are considering the latest remarks from Eric Balchunas, a senior ETF analyst at Bloomberg, who believes the approval odds for a Bitcoin ETF remain at 90%. However, he suggests that the final decision from the U.S. Securities and Exchange Commission may take more time to materialize. This implies that the market may have overreacted in both directions — displaying excessive confidence in the January 10th deadline while failing to differentiate between Matrixport’s analysis and actual news and events.
Attorney and commercial litigator Joe Carlasare aptly summarized the situation, describing the market as “overbought.” This suggests that buyers had leveraged themselves excessively, making them vulnerable to manipulation by whales and market makers. This assessment is supported by the ETH monthly futures annualized premium, which should typically fall between 5% and 10% in healthy markets.
Data indicates a surging demand for leveraged ETH long positions, with the futures contract premium jumping from 11% on December 18, 2023, to 27% on January 2, 2024. However, maintaining such positions for extended periods became costly for buyers. A 15% rally in ETH’s price during that period likely contributed to this surge in the premium.
The last time Ethereum bulls faced a similar significant loss in the futures markets was on August 17, 2023, when $170 million worth of long positions were liquidated. A similar intraday 15% correction occurred, causing the price to drop from $1,800 to $1,530. Nevertheless, ETH swiftly rebounded to $1,680 within two hours. It’s worth noting that this price recovery was short-lived, as ETH revisited the $1,530 bottom on September 11, 2023.
To gain insights into the exposure of whales and arbitrage desks using derivatives, one must analyze Ether options volume. By examining put (sell) and call (buy) options, we can gauge the prevailing bullish or bearish sentiment.
With the exception of a brief period on December 19, 2023, ETH put options have consistently lagged behind call options in terms of volume, often by a factor of two. This indicates reduced demand for protective strategies, highlighting the market’s confidence and excessive optimism, particularly in the Ether futures markets.
The root cause of the 14% flash crash on January 3rd may remain elusive. However, based on the Ethereum derivatives markets, it appears that investors grew overly confident and relied heavily on excessive leverage. This doesn’t necessarily undermine Ethereum’s overall bullish trend or diminish the likelihood of breaking the $2,400 resistance level before the ETF decision. Derivatives data suggests that the market remains healthy, at least from that perspective.
In conclusion, while the flash crash raised concerns, it may not necessarily signal the end of Ethereum’s bullish momentum. The crypto market often experiences volatility, and market sentiment can quickly shift. As investors continue to monitor developments, the path forward for Ethereum remains uncertain but filled with potential opportunities.
