Crypto markets rally, but Ethereum struggles to keep pace with Bitcoin

On May 15, the cryptocurrency markets saw a 5.5% increase in total capitalization following the release of inflation and retail sales data from the United States. However, Ether (ETH) failed to fully capitalize on this bullish momentum. Ether last closed above $3,000 over five days ago and has underperformed the leading cryptocurrency, Bitcoin (BTC), by 22% since the start of 2024. 

U.S. macroeconomic data backs the rally in some scarce assets

Crypto markets responded positively to U.S. consumer price index (CPI) data showing a 3.4% year-over-year rise in April, which aligned with market expectations. However, retail sales data for April, released on May 15, unsettled investors as it indicated stability from the previous month, contrary to economists’ forecasts of a 0.4% increase. This development increased the likelihood of the U.S. Federal Reserve (Fed) implementing measures to stimulate the economy.

Even if the U.S. Fed decides to maintain interest rates above 5.25% for an extended period to control inflation, the central bank may resort to actions such as purchasing government securities to boost the money supply and reducing the discount rate at which banks borrow from the central bank. Essentially, even a hint of continued liquidity provision can shape economic expectations and behaviors.

Contrary to what might be expected, weaker economic activity is often seen as an indicator that more money will be injected into the system, which benefits investments in scarce assets like stocks, gold, and cryptocurrencies. Eventually, the government will need to issue more debt to fund these expansionary measures aimed at preventing an economic recession. Over time, inflation is likely to rise due to the additional money circulating, regardless of the interest rate.

Some analysts believe that the upcoming U.S. Securities and Exchange Commission (SEC) decision on May 23 regarding VanEck’s spot Ethereum ETF application is a key reason for Ethereum’s inability to surpass the $3,000 resistance level. The uncertainty surrounding this event leads traders to postpone their investment decisions until the outcome is more certain, which is logical. No matter how optimistic one might be about Ethereum’s long-term prospects, a rejection from the SEC could lead to a short-term market correction.

Eric Balchunas, a senior ETF analyst at Bloomberg, has expressed doubt about the approval of a spot Ethereum ETF in 2024, given the regulator’s cautious approach towards products that may be classified as securities, particularly those that include native staking services. This skepticism is also evident in the Ether derivatives markets.

Ether’s derivatives markets reflect a lack of optimism

To understand how professional traders are positioned, it’s essential to examine the ETH futures and options markets. In neutral market conditions, Ether futures contracts are typically priced between 5% to 10% above the regular spot prices of ETH to account for the extended settlement period.

Currently, the Ether futures premium (basis rate) is at 9%, a figure that has remained stable for the past two weeks. This level indicates a general lack of enthusiasm concerning the decision on the spot ETF, suggesting a neutral sentiment among traders.

In the options market, there is an even balance in the demand for call (buy) and put (sell) options, as both types of instruments are trading at similar price levels. Typically, if traders expect a drop in Ether prices, the 25% delta skew metric will exceed 7%. Conversely, periods of high market excitement often result in a negative skew of 7%.

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If there had been an increased demand for bullish trades in anticipation of the spot Ethereum ETF decision, whales and market makers would likely have raised the prices for contracts that provide upside price protection. This would reflect their expectation of higher future prices and their intent to capitalize on traders’ willingness to pay more for potential gains.

Although it’s challenging to pinpoint the exact reasons behind Ethereum’s inability to capitalize on today’s gains in the cryptocurrency sector, ETH investors do not seem particularly optimistic about the approval chances of the spot Ethereum ETF. Additionally, other factors, such as the ETH supply becoming inflationary for the first time in 18 months, due to reduced transaction fees, may also be contributing to keeping ETH prices below $3,000.