Crypto Rally: Ethereum Lags Behind Bitcoin

On May 15, the cryptocurrency market experienced a 5.5% increase in total capitalization following the release of inflation and retail sales data from the United States. Despite this surge, Ether (ETH) struggled to fully leverage this upward momentum. Ether hasn’t closed above $3,000 in over five days and has underperformed compared to Bitcoin (BTC) by 22% since the year began.

The rally was largely supported by macroeconomic data from the U.S., particularly the consumer price index (CPI), which showed a 3.4% year-over-year rise in April, aligning with market expectations. The retail sales data for April, released on May 15, caused some unease among investors as it showed no change from the previous month, contrary to the anticipated 0.4% increase. This unexpected stability raised the chances of the U.S. Federal Reserve taking steps to stimulate the economy.

Even if the Federal Reserve opts to keep interest rates above 5.25% for a prolonged period to control inflation, it may still engage in measures such as purchasing government securities to boost the money supply and lowering the discount rate at which banks borrow from the central bank. Essentially, the notion of continued liquidity provision can significantly influence economic expectations and behaviors.

Interestingly, weaker economic activity is often perceived as a sign that more money will be injected into the system, which is favorable for investments in scarce assets like stocks, gold, and cryptocurrencies. To avoid an economic recession, the government may need to issue more debt to finance these expansionary measures. Over time, this increased money circulation is likely to lead to higher inflation, irrespective of the interest rate.

Some analysts believe that the U.S. Securities and Exchange Commission’s (SEC) upcoming decision on May 23 regarding VanEck’s spot Ethereum ETF application is a major reason for Ethereum’s struggle to surpass the $3,000 mark. The uncertainty surrounding this event has prompted traders to delay their investment decisions until the outcome becomes clearer. A rejection from the SEC, despite optimism about Ethereum’s long-term prospects, could result in a short-term market correction.

Eric Balchunas, a senior ETF analyst at Bloomberg, has expressed doubts about the approval of a spot Ethereum ETF in 2024, given the SEC’s cautious approach towards products that could be classified as securities, especially those involving native staking services. This skepticism is also reflected in the Ether derivatives markets, where there is a visible lack of enthusiasm among traders.

To gauge how professional traders are positioned, it’s useful to look at the ETH futures and options markets. Typically, Ether futures contracts are priced between 5% to 10% higher than the regular spot prices of ETH to account for the extended settlement period. Currently, the futures premium (basis rate) for Ether is at 9%, a figure that has remained stable over the past two weeks, indicating a neutral sentiment regarding the spot ETF decision.

In the options market, there is a balanced demand for call (buy) and put (sell) options, with both trading at similar price levels. If traders were expecting a drop in Ether’s price, the 25% delta skew metric would exceed 7%. Conversely, periods of high market excitement often result in a negative skew of 7%. If there had been increased demand for bullish trades in anticipation of the Ethereum spot ETF decision, whales and market makers would likely have raised the prices for contracts that offer upside price protection.

Although pinpointing the exact reasons behind Ethereum’s limited gains in the broader cryptocurrency market is challenging, it’s clear that ETH investors are not particularly optimistic about the SEC’s approval chances for the spot Ethereum ETF. Other factors, such as the ETH supply becoming inflationary for the first time in 18 months due to reduced transaction fees, may also be suppressing ETH prices below the $3,000 threshold.