Ethereum successfully completed its long-awaited transition to proof-of-stake via “merger” on September 15, as traders increasingly shorted Ether (ETH) in anticipation of a news sell event.
Ethereum funding rate plummets
Ether term funding rates on major derivatives platforms fell below zero – to their worst levels yet – ahead of the merger. The rate fell to -0.6% on BitMex.
Funding rates are a percentage of fees paid to holders of short or long positions. The platform decides the fee based on the difference between the perpetual futures contract and the spot price.
Therefore, traders consider a bull market when the funding rate is positive. Conversely, a negative funding rate portends bearish sentiment in the market. Let’s understand why with an example.
Currently, Ether’s average funding rate is around -0.1%. In other words, traders with a short ETH position of $1 million are willing to pay those with long positions $1,000 every eight hours (depending on when the platforms recalculate funding rates ).
This shows traders’ belief in a potential Ether spot price drop after the merger.
However, a consistently negative funding rate also increases the possibility of a short squeeze. A short squeeze occurs when an asset rises and short traders decide to hedge their position or are forced to do so via margin calls, thereby adding more upward strength to the price of the asset.
ETH technical prices suggest a 50% split
From a technical standpoint, Ether’s price may drop 50% in the coming weeks due to the formation of a symmetric triangle on its longer-term chart.
Notably, symmetric triangles are trend continuation patterns, i.e. they usually prompt the price to continue in the direction of its previous trend after a period of consolidation. Thus, Ether’s symmetrical triangle pattern appears bearish, especially since it formed after the token’s 80% decline from its November 2021 highs.
Theoretically, the downside target of a bearish symmetric triangle is calculated after subtracting the maximum height of the triangle from the breakout point. This puts ETH’s profit target in 2022 around $850.
Capital turnover in Bitcoin
In addition to negative funding rates and the symmetrical triangle pattern, Ether also faces downside risks from renewed interest in Bitcoin (BTC), the leading cryptocurrency by market capitalization.
On the daily chart, ETH/BTC fell to 0.078 BTC on September 15, nearly a week after peaking at 0.085 BTC. The pair’s correction came after a strong bullish cycle, in which its price rose more than 75% in less than three months.
“ETH’s pre-merger underperformance indicates that some traders are trying to price in a potential ‘news sell’ event,” Arcane Research noted in its weekly report, while adding:
“Whether or not the merger will turn out to be a ‘sell the news’ event remains to be seen.
In another weekly report, investment management company CoinShares reported a substantial drop in capital for Bitcoin and Ethereum-based investment products.
Related: Analyst on BTC $17.6,000 Low Price: Bitcoin ‘Not There Yet’
However, Ether funds saw withdrawals worth $61.6 million in the week ending September 9, compared to $13 million for Bitcoin.
Other hints of news selling come from a recent increase in Ethereum’s balance across all crypto exchanges. Notably, trade inflow volume hit a 1-month high of 22,723.289 ETH (7-day MA).
Traders usually increase their cryptocurrency deposits on exchanges when they want to sell their holdings. In other words, a growing balance of ETH on exchanges increases downside risks.
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