The traditional market has a saying that means like a trading rule, be neutral or short in the middle of a downtrend, which means betting on a decline. The problem is that a relief bounce misleads traders into believing that bearish sentiment has turned to an uptrend, with buyers in the upper hand.
For example, after analyzing the Ether (ETH) price chart, a trader might conclude that a bull run was triggered soon after the 41% crash. Unfortunately, this conclusion is wrong as markets can last for indefinite periods of time.
The chart above shows a long period of range trading near $2,800. Considering Ether’s annual volatility is 88%, a move from $2,400 to $3,200 is considered normal.
Using technical analysis, traders can spot lower highs forming a downtrend channel, but should the Ether bears celebrate and expect a slide to $2,500 or lower? That largely depends on the location of retail traders, along with the on-chain metrics of the Ethereum network.
Some things to consider are whether the 63% drop in transaction fees on the network to the current $17 reflects a decline in the use of decentralized applications (DApps) or users are benefiting from participating. with other Layer-2 scaling solutions?
No Ether Futures Premium
To determine how confident traders are in Ether price resilience, we should analyze perpetual futures contract data. It is the preferred derivative of retail traders as the exchanges offer leverage up to 50x and the price tends to accurately track the regular spot market.
In any futures trade, Long and Short are always matched, but using different leverage. Therefore, exchanges will charge a funding rate for the party that deposits less and this fee is paid to the other party.
This data tells us whether retail traders are getting excited with funding rates rising above 0.05%, or 1% per week. Notice how over the past few months funding rate has been negative, reflecting the neutral to bearish sentiment. Currently, there is no indication that retail traders are confident enough to buy Ether using leverage.
To rule out external factors that can affect derivative data, everyone should analyze the on-chain data of the Ethereum network. For example, tracking network usage tells us whether real-life use cases support demand for Ether tokens.
On-chain metrics raise concerns
Measuring the value of Ether traded on the network provides a quick and reliable indicator of effective usage. Of course, this metric can be spoofed by increasing adoption in Layer-2 solutions, but it acts as a starting point.
Average daily transactions are currently at $6.7 billion, up 6% from 30 days ago, but it’s a long way from the $9 billion seen at the end of 2021, the data shows. Ether traders show no signs of growth, at least on the main layer.
Everyone should research DApp usage metrics, but avoid focusing solely on Total Value Locked (TVL) as it is heavily focused on lending platforms and decentralized exchanges (DEXs), thus , the evaluation of the number of active addresses provides a broader view.
On average, DApps on Ethereum have dropped 10% monthly on active addresses, which is disappointing as it is specifically designed to host DApps like the NFT and DeFi marketplace.
Unless there is good growth in Ether trading and DApp usage, the bears are likely to prevail. As for the neutral retail funding rate, it should not be taken as a bearish signal as these investors often enter leveraged long positions after a strong rally.