Assessing Ethereum [ETH] Derivatives Demand Behavior Ahead of 2023

Glassnode alerts recently revealed that ETH supply has reached a monthly high. This is a welcome change from the relative inactivity we’ve seen in the first half of this week.

The observed increase in supply activity is a welcome change of pace. This is because we previously observed a drop in ETH supply while it was active, which has resulted in relatively subdued price action. In other words, lower volatility results from low activity.

An examination of Ethereum‘s supply distribution reveals an intriguing finding from the top addresses. The top addresses have been more active, particularly in the last four days. Some of the top addresses, including those with 10,000 to one million ETH, increased their holdings this week.

Meanwhile, addresses with 1,000 to 10,000 coins, as well as those with one million to ten million coins, saw their balances plummet. These observations confirm that there is mixed activity among the whales, making prediction more difficult.

The first key observation from the derivatives market is that demand for ETH has improved slightly in recent days. This is reflected in the increase in open interest in ETH since December 5th.

Nonetheless, the increase demonstrates low investor enthusiasm, implying a lack of strong demand. In the last three days, the Ethereum long liquidations metric has experienced a net loss. This confirms that the number of liquidated long positions has decreased.

One possible explanation for the above result is that ETH’s price action has been limited since the beginning of the month. It is also possible that investors are less motivated to execute long trades.

Given the estimated leverage ratio’s downside, this is the most likely outcome. For the last three weeks, the latter has been on a downward trend.

Based on the above derivatives market observations, we can conclude that demand is beginning to recover. However, investors are still avoiding leverage, most likely due to the market’s high levels of uncertainty.

What is the significance of this? When the markets began to favor short-term trades due to lower volatility, traders opted to use leverage to make significant profits.

Unfortunately, recent events highlight a shakeup that appears to be aimed at leverage traders. As a result, the price of ETH has been relatively stable. A greater preference for leverage will almost certainly herald the return of directional volatility.