Today’s 10% drop in Ether (ETH) caused its annualized futures base to adjust after flirting with extremely optimistic territory. The base indicator compares the price of futures contracts to the current level on regular spot exchanges.
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Healthy markets generally show an annualized basis between 5% and 15%, this is a situation known as contango. On the other hand, a negative base (futures premium) generally occurs during strongly bear markets.
The chart above shows an annualized basis of Ether’s futures rising above 20% yesterday, which is generally unsustainable. The same move occurred on August 13 when Ether broke the USD 420 resistance, but was unable to hold that level for at least a week.
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A base indicator above 20% is not necessarily a pre-collapse warning, but shows buyers of extremely leveraged futures contracts. This overconfidence only represents a greater risk if the market falls below USD 420.
This is not a magic number, but the Etoro level when the base exceeds 15%, signaling greater use of leverage by buyers.
Sellers were not liquidated
Those betting on the $500 should be happy to know that open interest increased, despite a 35% bull run in thirty days to $480. Those betting on an adverse price movement have long been liquidated after such a strong upward movement.
Ether’s open futures interest peaked at $1.7 billion on August 14, and is currently at $1.5 billion. This indicates that futures contract sellers are primarily arbitrage, trying to get the premium from the base mentioned above.
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Cash and carry transactions consist of the purchase of the underlying asset and the simultaneous sale of futures contracts. This is a fully hedged trade, so there is no way to be liquidated due to the leverage. Therefore, a steady increase in open interest despite such a strong upward movement is a positive indicator.