Traders reduce bullish bets as ETH struggles to reclaim $3,000

Ethereum (ETH) is still struggling after failing to break above the top of the descending channel for five consecutive weeks. A 17.5% correction in five days after testing the $3,000 resistance on March 2 showed that buyers were somewhat reluctant to defend the price.

Ethereum has so far suffered from high network transaction fees, although it has dropped from $19 in mid-February to the current $13 per transaction. While this is lower than previously seen peaks, $13 per transaction is still not suitable for most games, NFTs, or even decentralized finance transactions.

Even more worrisome than Ethereum’s performance is the 55% drop in Ethereum’s total value locked (TVL) on March 8. The data shows that the proportion of assets locked in its smart contracts has reached an all-time low compared to its competitors.

This indicator can partly explain why Ethereum has been in a downtrend since early February. But, more importantly, one needs to analyze how professional traders position themselves, and there is no better measure than the derivatives market.

Futures contango has flattened

In order to understand whether the current bearish trend reflects the sentiment of top traders, one should analyze the Ethereum futures contract premium, which is also known as the “basis.” Unlike perpetual contracts, these fixed-maturity futures do not have a funding rate, so their prices can vary significantly from regular spot transactions.

By measuring the gap in fees between the futures and regular spot markets, traders can gauge the degree of bullishness in the market. Conversely, bearish sentiment tends to cause three-month futures contracts to trade at annualized premiums of 5% or less.

A neutral market, on the other hand, should exhibit a basis of 5% to 15%, reflecting the reluctance of market participants to get locked into cheap ETH until trades are settled.

The chart above shows that Ethereum’s contango bottomed out around 1.5% on Feb. 28, a level typically associated with mild pessimism. Despite the slight improvement to the current 3% basis, futures market participants are reluctant to open leveraged long (buy) positions.

Long-short data confirms this

Top traders' net long-short ratios do not include external factors that may affect long-dated futures instruments. By analyzing the positions of these top clients on spot, perpetual and futures contracts, it is possible to better understand whether professional traders tend to be bullish or bearish.

There are occasional methodological differences between exchanges, so viewers should monitor changes rather than absolute numbers.

Curiously, when Ethereum’s contango bottomed out at 1.5% on February 28, ETH’s price was very close to the current $2,600. Therefore, it makes sense to compare the long-short ratios of top traders over this period.

Binance shows that top traders had the same position level in Ethereum on February 8 and March 8, at 0.92. However, these whales and market markers on Huobi and OKX effectively reduced their longs. For example, Huobi’s long-short ratio has dropped from 1.07 to its current 1.00. Also, OKX Trader's current ratio of 1.47 is less than the 1.58 it was 8 days ago.

All data point to further downtrend

Judging by the indicators discussed above, it is highly unlikely that the price of Ethereum will turn bullish in the short term. The data suggests that professional traders are reluctant to add to long positions, as evidenced by basis spreads and long-short ratios.

Additionally, TVL data does not support a strong usage indicator for Ethereum smart contracts. Continually delaying the migration to proof-of-stake solutions while losing out to competitors is likely to draw investor attention away and make bulls uncomfortable.