As Ether (ETH) made a $2,800 all-time on April 29, so did its futures open interest. The $8.5 billion figure marks a 52% monthly increase and shows robust trading activity behind the meteoric price rise.
Some analysts might dismiss Ether derivatives, considering CME’s future has $355 million in open interest compared to Bitcoin’s $2.4 billion. However, Ether contracts were only launched a couple of months ago. Both FTX and Deribit require 100% full-KYC for their clients, and these markets hold a combined $2 billion in ETH open interest.
To this in perspective, the open interest on silver futures currently stands at $22.6 billion. The precious metal has decades of trading history and a $1.4 trillion market capitalization. However, a simple analysis of the number of outstanding contracts isn’t really helpful as these can be used for hedging.
Growth in futures is positive but not a guaranteed bullish indicator
To assess whether the market is leaning bullish, there are a couple of derivatives metrics to review. The first one is the futures premium (also known as basis), which measures the price gap between futures contract prices and the regular spot market.
The 3-month futures should usually trade with a 10% to 20% annualized premium, which should be interpreted as a lending rate.
As the above chart depicts, ETH’s futures premium went berserk in mid-April, peaking at 45% annualized. Although traders’ FOMO played a role, this also signaled extreme optimism. While professional traders most frequently use monthly futures contracts, perpetual contracts are the go-to instrument of retail investors.
Retail investors are flat at the moment
Perpetual contracts are also known as inverse swaps, and these contracts have a funding rate usually charged every 8 hours. This fee increases as longs (buyers) use higher leverage, so their accounts get drained little by…