Ethereum breaks $2,900, but watch out for futures overheating

Ethereum has risen above the $2,900 level over the past day, but data suggests the futures market may be starting to overheat.

Ethereum has now breached the $2,900 level.

While Bitcoin has been in a generally flat decline recently, Ethereum appears to have decided to choose its own path. That’s because the sector’s second-largest asset has surged nearly 4% in the last 24 hours.

The jump saw Ethereum hit $2,900 for the first time since early May 2022. The chart below shows the coin’s performance over the past few days.

The price of the asset appears to have shot up over the past day | Source: ETHUSD on TradingView

Following this rise, Ethereum investors have now enjoyed gains of over 16% over the past week. During the same period, Bitcoin’s return was only about 8%.

While ETH’s decoupling could be a bullish sign for the asset, a pattern seems to be emerging that could turn out to be a worrying sign.

ETH open interest has recently shown a rapid increase.

As one analyst explains in a CryptoQuant Quicktake post, ETH open interest has recently surged significantly. “Open Interest” is an indicator that tracks the total amount of Bitcoin futures contracts currently open on all centralized derivatives exchanges.

An increase in the value of this indicator means that investors are currently taking new positions in the futures market. This trend can result in increased volatility in cryptocurrencies, as total leverage in the sector typically increases as more positions are introduced.

On the other hand, a decline in the indicator means that ETH futures contract holders are either voluntarily closing their positions or are being liquidated by the platform. After such a decline, asset prices may move more steadily.

Now here is a chart showing the trend of Ethereum open interest over the past few years:

The value of the metric seems to have rapidly been going up in recent days | Source: CryptoQuant

Looking at the graph, we can see that Ethereum open interest has recently risen to high levels and has reached a peak higher than it has ever been in almost two years.

“This surge signals continued confidence in Ethereum’s current upward trend among futures traders,” the quant points out. “However, given the impulsive nature of the recent rally, traders should exercise caution and consider the possibility of a sudden liquidation event that could trigger a noticeable price decline in the short to medium term.”

As mentioned earlier, when this indicator rises, the likelihood of volatility in the asset increases. The cause of this volatility may be a mass liquidation event called a squeeze, which can trigger a violent knock-on effect in futures markets, amplifying the price movements that triggered the event.

With Ethereum open interest currently very high, futures pressure could definitely occur for the cryptocurrency.

Featured image by DrawKit illustration from Unsplash.com, chart from TradingView.com, CryptoQuant.com

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