Is Ethereum’s sudden drop to $2,000 an indication of the end of its bullish trend?

On January 3, the price of Ether (ETH) experienced a significant 14% correction, plummeting from $2,380 to $2,050 in less than two hours. This price level had not been observed since December 1, 2023, and the unexpected swing led to the liquidation of $100 million worth of ETH long futures contracts—leveraged bets on a price increase.

Traders are now questioning the implications of this correction and whether it marks the conclusion of the bullish momentum, especially after three unsuccessful attempts to breach the $2,400 mark in the past month. Coincidentally, this was also the third occasion Ether’s price dipped below $2,150 during the same period, making it challenging to argue that the bullish momentum has waned.

One notable aspect from the price chart is the swift recovery to $2,230 on January 3, indicating that whatever triggered the panic selling and derivatives liquidations may have weakened. Some attribute the trigger to a market analysis released on January 3, pointing to the denial of the spot Bitcoin ETF, published by Matrixport. Importantly, Matrixport, co-founded by Jihan Wu, known for his success in the ASIC miner business at Bitmain, might have influenced the market.

Crucially, investors are considering the recent remarks from Eric Balchunas, a senior ETF analyst at Bloomberg. Balchunas, in an interview with Cointelegraph, stated that the approval odds remain at 90%. However, he emphasized that the final decision from the U.S. Securities and Exchange Commission might take longer to materialize. Essentially, the markets might have reacted excessively in both directions: displaying excessive confidence in the January 10 deadline and failing to distinguish Matrixport analysts’ opinions from actual news and events.

Data reveals a rising demand for leveraged ETH long positions, with the futures contract premium surging from 11% on December 18, 2023, to 27% on January 2, 2024. However, sustaining such positions for extended periods became costly for buyers. This surge in the metric followed a 15% rally in ETH’s price during that period.

The last time Ether bulls faced such a substantial 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, dropping the price from $1,800 to $1,530, but ETH quickly rebounded to $1,680 within two hours. However, the price recovery did not hold in the medium term, as ETH revisited the $1,530 bottom on September 11, 2023.

To assess the exposure of whales and arbitrage desks using derivatives, one must examine Ether options volume. By analyzing put (sell) and call (buy) options, we can estimate 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 volume, approximately by a factor of two. This suggests reduced demand for protective strategies, reinforcing the confidence and excessive optimism observed in the Ether futures markets.

The cause of the 14% flash crash on January 3 may never be definitively determined. However, judging by Ether derivatives markets, it appears that investors became overconfident and relied heavily on excessive leverage. This does not necessarily invalidate Ether’s bull run or make gains above the $2,400 resistance less likely before the ETF decision. Data indicates that the market is healthier, at least from a derivatives perspective.