There is an old saying in traditional markets which is actually more like a trading rule. It goes, “when the trend is negative, one can only be neutral or short,” meaning bet on the price decrease. The problem is that a relief bounce tricks traders into believing that the negative prevailing sentiment has shifted into a buyers’ market.
For example, after analyzing Ether’s (ETH) price chart, one might conclude that after a 41% crash, a bull run should be ignited sooner rather than later. Unfortunately, this is a bit of a fallacy because markets can exist in periods of non-definition (trendwise).
Thus, you could say that the above chart presents a long period of range trading near $2,800, for example. Considering Ether’s 88% annualized volatility, moves between $2,400 and $3,200 should be regarded as normal.
Using technical analysis, a trader might point to lower highs forming the above downtrend channel, but should Ether bears celebrate and call for $2,500 and lower? That largely depends on how retail traders are positioned, along with the Ethereum network’s on-chain metrics.
A few things to consider are whether the 63% drop in network transaction fees to the current $17 reflects a decrease in the use of decentralized applications (DApps), or are users benefiting from engaging with other layer-2 scaling solutions?
Ether’s futures premium is absent
To understand how confident traders are about Ether’s price recovery, one should analyze the perpetual contracts futures data. This is the retail traders’ preferred derivative because exchanges offer up to 50x leverage, and its price tends to track the regular spot markets perfectly.
In any futures contract trade, longs (buyers) and shorts (sellers) are matched at all times, but their leverage use can vary. Consequently, exchanges will charge a funding rate to whichever side deposited less margin, and this fee is paid to the opposing side.
This data tells us whether retail traders are getting excited, causing the funding rate to move above 0.05%, equivalent to 1% per week. Notice how the past couple of months showed a slightly negative funding rate, reflecting a neutral-to-bearish sentiment. Currently, there is no sign that retail traders are confident enough to buy Ether using leverage.
To exclude externalities that might have influenced derivatives data, one should analyze the Ethereum network’s on-chain data. For example, monitoring the network use tells us whether actual use cases support the demand for Ether tokens.
On-chain metrics raise concern
Measuring the monetary value of the Ether transacted on the network provides a quick and reliable indicator of effective use. Of course, this metric could be masqueraded by increasing adoption in layer-2 solutions, but it works as a starting point.
The current $6.7 billion daily transaction average is a 6% increase from 30 days before, but it’s nowhere near the $9 billion seen late-2021. Data shows that Ether token transactions are not showing signs of growth, at least on the primary layer.
One should proceed to decentralized applications usage metrics, but avoid exclusive focus on the Total Value Locked (TVL) because that metric is heavily concentrated on lending platforms and decentralized exchanges (DEX), so gauging the number of active addresses provides a broader view.
On average, Ethereum DApps saw a monthly 10% decrease on active addresses. In a nutshell, the data is disappointing because the smart contract network was specifically designed to host decentralized applications such as non-fungible token (NFT) marketplaces and decentralized finance, DeFi.
Unless there is a decent growth in Ether transactions and DApps usage, bears are likely to have the upper hand. As for retail traders’ neutral funding rate, it should not be considered a bearish sign as those investors typically enter long leveraged positions after a strong price rally.
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.