Why traders are betting on Ethereum crash, driving market sell-off

Ethereum (ETH) derivatives traders expect a decline in Ether price in the coming weeks. Ether is trading above $2,200 on Friday as Bitcoin gains ground after a flash crash under the $80,000 level. 

Bitcoin is back above $83,500 leading a market-wide recovery. The open interest in Ethereum is recovering slowly after the market-wide de-leveraging this week. 

Ethereum price declines, derivatives traders bearish

Ethereum is trading at $2,214, correcting 4% on the day. The largest altcoin is highly correlated to Bitcoin, therefore the BTC flash crash under $80,000 and the subsequent recovery influenced the Ethereum price trend. 

While Ether struggles to gain ground among traders, derivatives data from Coinglass shows bearish bets. The long/short ratio, a metric that compares the number of long positions against short ones, reads 0.9562. 

A value less than one indicates a higher expectation of a price decline, as it signals a larger count of short positions in Ether. 

Nick Forster, Founder of Derive.xyz, evaluated the derivatives data in the Ethereum market and observed that the 7-day at-the-money (ATM) implied volatility (IV) has fallen from a high of 84% from earlier in the week to the current level of 65%. 

A decline in 7-day ATM IV is a sign of temporary volatility stabilization or a lower expectation of price swings in Ether. 

Ethereum 7-day ATM IV | Source: Amberdata
 

“We anticipate that volatility could increase again around the upcoming FOMC meeting on March 19, where the Federal Reserve's decisions may affect market sentiment. Furthermore, with the delayed rollout of ETH’s Pectra upgrades now scheduled for April, we could see an uptick in volatility as traders react to new developments surrounding scalability improvements and changes to network mechanics in Q2,” Forster said.

Forster explained that as crypto traders feel the pressure of the sell-off in the market, altcoins have experienced significant sell-offs and traders are seeking downside protection. 

Forster’s key observations include: 

• Sharp drop (15 and 6%) in ETH 25 delta skew for the 7-day and 30-day options. 
• With strong demand for puts, traders are betting on an Ether price crash and there is a lower interest in calls. 
• Traders are focused on protecting portfolios amidst the market correction. 

“This [seeking downside protection through higher demand for puts] behavior is a direct response to the continued volatility and uncertainty, especially in the wake of large institutional BTC ETF outflows. In the past few days, we've seen significant net outflows including -$1.14 billion on February 25 and -$540 million on February 24. These outflows suggest that institutional investors are increasingly pulling their funds, which is adding to the selling pressure across the crypto space. 

The fear is that this could create a negative feedback loop, where continued selling drives more selling, further driving prices lower,” added Forster.