Are ETH Leveraged Long Liquidations Suppressing Its Upside Potential?
Ethereum [ETH] price action may have picked up a slight boost so far since the end of August. Its price action looks less exciting than anticipated, especially now that the merger is less than two weeks away. Is it due to a lack of sufficient buying pressure or is there something else to this performance?
The prevailing narrative of ETH for the past few weeks has been focused on the Fusion. As is often the case, a rally is expected in the weeks or days before a major upswing and then investors sell the news. The merger is less than two weeks away and the price of ETH has been touching bearish territories.
One possible reason for the low price of ETH is the liquidation of long leveraged positions. It registered strong demand in August, especially in the first half of the month, before a considerable pullback. The ETH Leverage Index posted a strong rally in the first half of August, followed by a sizeable pullback. This confirms that the use of leverage as a price started to increase.
The next major increase in the leverage ratio occurred towards the end of the month, but it has since subsided. A drop in Ethereum funding rates preceded each leverage ratio pullback. This result is consistent with the bearish days of ETH during the month.
ETH's performance on August 19 was one of the best examples of an instance where long leveraged liquidations tempered price action. The price had cooled off after briefly entering overbought territory in mid-August and leveraged traders began adding to their positions.
The market recorded its largest ETH leveraged long liquidations on August 19 and this created a strong wave of selling pressure. A similar incident occurred on August 26, when longs increased, followed by another major spike in long liquidations.
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One notable observation is that there was a deviation between the ETH funding rates and the estimated leverage ratio. Similarly, futures open interest and futures long settlement metrics demonstrated divergence.
Therefore, traders should consider looking at the aforementioned metrics to determine healthy entry or exit points. Other market forces have also been in play to dampen ETH's upside potential, but long sell-offs have clearly played a role.
Sep 03, 2022