Ethereum (ETH) open interest has consistently declined throughout 2024, now nearing levels last observed in January. Despite a dynamic start to the year, Ethereum’s derivative activity has notably slowed in recent months, mirroring the broader bearish market sentiment.
Derivative trading slows as open interest declines
In 2024, Ethereum’s derivative trading has steadily decreased, particularly since the local peak in June. Open interest has been trending downward, falling from above $12 billion to $7.65 billion as of September, reminiscent of early 2024. This decline is not a one-time occurrence but part of a broader trend, with open interest levels consistently low throughout the year. In January, open interest fluctuated between $5 billion and $6 billion, and the current trajectory suggests a continued decline.
ETH open interest continued downward as holders and buyers wait on the sidelines. | Source: Coinalyze
The drop in open interest is a potential indicator of future price movements, with a growing possibility of increased short positions if ETH continues to decline, potentially falling below $2,000. Additionally, funding rates have dropped below their 50-day moving average, with more frequent negative funding days since the August 5 correction, adding to the challenges in the derivative markets.
Impact of low open interest and funding rates on the market
The persistent decline in open interest and the fluctuating funding rates have significant implications for Ethereum and the broader market. Historically, ETH funding rates have been mostly positive, driven by a bullish bias. However, these rates have dipped more frequently in the past two months, potentially impacting the DeFi space and other related sectors.
The possibility of a short squeeze also looms, as September has already seen liquidations among ETH pessimists. While around 30% of leveraged positions are short on ETH, caution remains as market participants monitor the ongoing selling pressure from whales. The daily net selling by almost all Ethereum ETFs, combined with sporadic buying, adds to the uncertainty. Although the Ethereum Foundation and Vitalik Buterin have reportedly ceased selling, the broader market remains cautious.
Ethereum faces challenges amid bearish sentiment
The decline in open interest accelerated following the August 5 correction, with Ethereum struggling to maintain above $2,500. Regular dips below $2,300 and a drop to 0.04 BTC have weakened the narrative of Ethereum’s dominance during the latest bull market.
Both retail traders and large-scale investors are adopting a cautiously bullish stance on ETH. While whales holding more than 100,000 ETH continue to accumulate, smaller holders have liquidated their positions during market downturns. Overall, retail usage of ETH remains stagnant as cryptocurrency loses its exclusivity as the primary onboarding chain for various activities.
The shift in Ethereum’s narrative, from being considered ultra-sound money to facing challenges in maintaining its deflationary status, has further complicated its position in the market. While ETH was briefly deflationary, it has since returned to a higher production rate, with up to 900,000 new tokens generated annually.
This inflation rate has raised concerns about ETH’s long-term value proposition compared to Bitcoin, especially as Ethereum’s reliance on DeFi, passive income, and fee-generating applications continues to grow. Ethereum’s struggles to maintain its dominance and narrative as sound money suggest that the asset may face further challenges shortly. The ongoing bearish sentiment, the decline in open interest, and fluctuating funding rates indicate a complex road ahead for Ethereum in 2024.