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cryptocurrency December 18, 2021

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ETH price could hit new lows near $3,600, but derivatives data suggests pro traders still feel bullish.

Since hitting an all-time high at $4,870 on Nov. 10, Ether (ETH) price has been posting lower lows over the past 50 days. If this downtrend continues, the lower trendline support suggests that the altcoin will bottom at $3,600. Still, derivatives data is signaling that pro traders are not concerned about the seemingly bearish market structure.

Ether/USD price on FTX. Source: TradingView

Notice how the price peaks are getting lower on the 12-hour time frame as mounting regulatory concerns drive investors away from the sector. In a press conference on Dec. 17, Russia’s Central Bank governor, Elvira Nabiullina, stated that banning crypto in the country is “quite doable.”

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Nabiullina cited crypto’s frequent use for illegal operations and significant risks for retail investors. Russian President Vladimir Putin also recently criticized cryptocurrency by saying they are not backed by anything. Interestingly, the country plans to launch its own central bank digital currency even as the Russian ruble lost 44% against gold over the past four years.

In the United States, a bipartisan group of U.S. senators has called on Treasury Secretary Janet Yellen to clarify the language in the infrastructure bill relating to the crypto tax reporting requirements. Under the current broader “broker” definition, miners, software developers, transaction validators and node operators will likely be required to report digital asset transactions worth more than $10,000 to the Internal Revenue Service.

Even with the regulatory uncertainty and negatively skewed price action, traders should monitor the futures contracts premium — also known as the “basis rate” — to analyze how bullish or bearish professional traders are.

Pro traders are neutral despite the price weakness

The basis indicator measures the difference between longer-term futures contracts and the current spot market levels. A 5% to 15% annualized premium is expected in healthy markets. This price gap is caused by sellers demanding more money to withhold settlement longer.

However, a red alert emerges whenever this indicator fades or turns negative, also known as “backwardation.”

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Ether 3-month futures basis rate. Source: Laevitas.ch

Notice how the sharp decrease after the 24% intraday crash on Dec. 3 caused the annualized futures premium to reach its lowest level in two months. After the initial panic, the Ether futures market recovered to the current 9% level, which is close to the middle of the “neutral” range.

To confirm whether this movement was specific to that instrument, traders should also analyze the options markets. The 25% delta skew compares similar call (buy) and put (sell) options. The indicator will turn positive when “fear” is prevalent because the protective put options premium is higher than similar risk call options.

When market makers are bullish, the 25% delta skew indicator shifts to the negative area, and readings between negative 8% and positive 8% are usually deemed neutral.

Ether 30-day options 25% delta skew. Source: Laevitas.ch

Related: Senate hearing on stablecoins: Compliance anxiety and Republican pushback

For the past three weeks, the 25% delta skew ranged between a positive 3 and 8 which is in the neutral zone. Consequently, options market data validate the sentiment seen in futures markets and signals that whales and market makers are not worried about the recent price weakness.

If investors “zoom-out” a bit, they will see that Ether’s year-to-date gains are at 300%, and this explains why pro traders are not worried about a 20% drop from the $4,870 all-time high.

Furthermore, the Ethereum network’s total value locked in smart contracts doubled over the past six months to $148 billion. This data gives derivatives traders the confidence needed to remain calm even with the current short-term price weakness.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.