Ethereum (ETH), for instance, was recently trading right around $2,500. This scenario begs the important question of whether this rally is fundamentally driven or merely a knee-jerk response to larger macro geopolitical developments and ETF inflows. LeeChiaJian sreconc9 is an active observer of the cryptocurrency ecosystem. He breaks down what’s driving ETH’s recent price action and assesses whether it’s sustainable given both global macro uncertainty and what’s going on inside the ETH network itself.

From these two developments alone, one could understand how recent price movements in the crypto market have been drastically affected by escalating geopolitical tensions. The specter of a potential US attack on Iran’s nuclear facilities is adding to market volatility. At the same time, continued tensions between Israel and Iran are increasing this instability. Market analysts are reading the early returns with bated breath. They foresee more severe volatility, as these geopolitical conflicts may ignite a more general risk-off tone in financial markets. In the process, the US could find itself engaged directly in these conflicts. This increased involvement would potentially bring greater uncertainty and could upend the nascent crypto market. Other forces make a challenging environment for ETH. More importantly, it’s important to separate the real market momentum from a reaction to world events.

Global political events make for even more volatility. Performance of Ethereum ETFs provides a unique view on the price rally that just happened. ETH ETFs are as hot as a lava shark! They’re on pace to recently top $4 billion in net inflows, a stunning 11 months after their debut, including an astonishing $1 billion addition in just the last 15 trading days. In contrast, Bitcoin ETFs have accomplished the opposite. In their first year on the market, they combined for a staggering $36 billion, demonstrating that ETH ETFs have failed to attract the same momentum from investors. Though it was a different time, the recent ETF inflow wave represented a huge quarter of all net ETF inflows. This record-breaking accomplishment would have happened in less than one-tenth of the full trading days. This is indicative of a larger, though still fledgling, interest in ETH from the institutional investor base.

Futures Premium and Leveraged Positions

To determine how strong and sustainable ETH’s rally is, look no further than the futures premium. Keep an eye on demand for leveraged positions. As it stands, the -2% ETH futures annualized premium indicates weak demand for leveraged longs (buys). In a healthy market, we would expect to see a 5% to 10% annualized premium. This premium captures both the value of opportunity and the exchanges’ risk. The latest ETH futures premium plunge has reached a 13-month low. This steep drop is an indicator for a lack of confidence in the market, as investors are hesitant to pay enormous premium dollars for futures contracts. While the bearish call is definitely an outlier, this sentiment does make one question the underlying strength of the rally.

Understanding ETH Futures Premium

  • High Premium (5-10%): Indicates a bullish market with strong demand for leveraged positions.
  • Neutral Premium (Around 5%): Reflects the cost of opportunity and exchanges’ risk.
  • Low Premium (Below 2%): Suggests a bearish or uncertain market with a lack of confidence.

The lack of demand for leveraged longs implies that the current price surge may not be driven by strong, confident buying pressure. This leads to some key questions about the rally’s sustainability. Is this a healthy trend, or are we just seeing a speculative bubble fueled by short-term liquidity events such as ETF inflows and short-term geopolitical shock?

Network Fees and Competition

For ETH’s market cap to prosper, it must find a way to maintain relatively low network fees. It has to do all this while fending off competition from other blockchains. Ethereum gas fees consist of two main components: the gas limit (maximum computational power for a transaction) and the gas price (cost per unit of gas), priced in tiny fractions of ether (ETH) called gwei (10^-9 ETH). Excessively high gas fees, especially popular Ethereum gas fees, can frustrate users and push them to competitor blockchains with cheaper alternatives. The main factors affecting Ethereum gas fees are network congestion, the use of layer 2 technologies, and possible alternatives to Ethereum.

Factors Affecting Ethereum Gas Fees

  • Network Congestion: Increased activity leads to higher fees due to limited block space.
  • Layer 2 Technologies: Solutions like Optimistic Rollups and zk-Rollups minimize gas prices by aggregating many transactions.
  • Alternative Blockchains: Competing platforms offer lower fees, attracting users and applications.

Layer 2 solutions like Optimistic Rollups and zk-Rollups seek to reduce gas prices by batching thousands of transactions together. Sharding technology and Layer-2 solutions such as optimistic rollups will reduce gas fees on Ethereum by at least 1000x. These improvements will help make transactions cheaper for users. Ethereum is under extreme pressure from competing blockchains that offer users much cheaper transaction costs. Until these potential solutions are implemented on the ground and adopted at scale, this vulnerability will remain.

Bullish Trend Confirmation

For a sustainable bullish trend, certain technical indicators must be set. Sustained trading above $2,400 is key. This developing pattern combined with increasing volume is a preparation for the bull flag to be completed on daily charts. A surge in volume, such as the highest volume engagement since July-August 2022, suggests renewed retail and institutional interest, which is essential for a sustainable bullish trend. Such a high level of engagement indicates that the market is not just jumping on short-term news. Rather, it is experiencing serious genuine purchasing demand.

Volume confirmation is important for this reason. It confirms the price surge. Without powerful volume, a breakout could be a “fakeout,” where an uptrend is swiftly followed by a price reversal. Today’s high volume spike is a further sign that the current rally is gaining some serious momentum. Nonetheless, we must continue this momentum to seal the deal on a permanent bullish trend. LeeChiaJian isn’t the only advocate for monitoring volume trends. It’s an important insight for traders and investors looking to understand the real health of the ETH market.

The recent price rally of ETH to $2,500 provides some positive signals. As real as that hope is, he believes there should be tremendous caution in this moment. The trigger for the rally goes beyond geopolitical events and ETF flows, as internal network dynamics paved the way. In addition, the weak futures premium signals a level of uncertainty in the market. For the bullish trend to be validated we require sustained displayed trading volume $2,400+. Ethereum’s long term success is in part based on their success dealing with their network fees and competing with other blockchains. At KnowingCoin.com we believe in making expert readers, not expert n00bs. So use the tools that allow you to get a handle on your chain and approach the crypto arena like a boss!