Ethereum (ETH) recently offered traders a real lesson in market volatility.
No matter how dominant a bullish market may seem, a correction is inevitable. ETH prices rose parabolically in the first week of August and, after testing resistance at $4,200 several times, the cryptocurrency managed to break through it and reach a cyclical high of $4,793.
The movement from 3.400 $ to 4,793 $ was for many traders a life-changing opportunity, but anyone who knows the markets knows that such a vertical rally is bound to attract profit-taking sooner or later.
We are currently in a market environment where profit-taking is the main theme. It was only a matter of time before it manifested itself: traders usually cash out when they hit their target or close loss-making positions to limit the damage when the strategy turns out to be wrong.
The decline from the all-time high of $4,793 has been steady, and the crucial question now is: where will ETH prices go from here? In this exclusive article, we offer a data-driven analysis of the main factors behind Ethereum's current selloff.
The Change of Sentiment in the Derivatives Market
It all started with a shift in sentiment among derivatives traders. The first sign was seen with the drop in the taker-buy/sell ratio, a key metric to watch. Traders have been selling Ethereum at an increasing rate since the beginning of the month. In fact, according to CryptoQuant, the figure has remained below unity (0.92) for most of the time since 1 August.
This is not an encouraging sign: a taker-buy/sell ratio of less than one indicates that traders are executing sell orders (taker-selling: executing an order before a new order is entered in the book) to a greater extent than they are buying in the futures market.
As a result, traders have been liquidating their long positions at an accelerating pace. When the July/August rally began, after months of sideways movement, every rise was an attractive opportunity to take profits, especially for those who had been trapped in previous long positions.
Cautious Traders
After a few days of large-scale liquidations of long positions, traders began to capitulate, selling ETH en masse. Many traders, both long and short, cashed in at least part of the profits in the run up to $4,793.
Confirming the loss of bullish momentum is also the Ethereum Estimated Leverage Ratio (ELR), which fell to a five-day low of 0.66. The ELR is an indicator that measures the average leverage with which traders are trading.
The recently observed drop in leverage signals that traders are reducing risk in their portfolios, closing out highly leveraged positions on ETH and replacing them with safer, less risky trades.
Conclusions
In the end, ETH remains under selling pressure, confirming the loss of bullish momentum. The week started with a test of the $4,200 area, after peaking at $4,793. The next support at $4,063 offers momentary relief to buyers, but a clean break of this level could open the way for further declines, with the next key support in the $3,491 area.
On the flip side, a reversal would require consistent demand to counter the bearish dominance. A return towards the all-time high of $4,793 would require a near-perfect execution by buyers, overcoming the current build-up of selling pressure.
In summary, the scenario is tilted in favour of the bears and until the derivatives market shows signs of a bullish recovery, it will be prudent to move cautiously.
