Cardano price gains 88% — Is the ADA rally just getting started?

Cardano (ADA) surged by 88.8% between Nov. 18 and Dec. 3, reaching its highest price in nearly three years at $1.33. This rally mirrored broader gains in the altcoin market, which reached a peak of $1.52 trillion on Dec. 3, up from $1.16 trillion on Nov. 18.

The 15-day ADA rally was accompanied by an all-time high in leveraged positions using futures contracts, prompting traders to question whether the dip to $1.16 on Dec. 3 presents a buying opportunity and to evaluate the potential risk of cascading liquidations.

Cardano, along with Stellar (XLM), XRP, Algorand (ALGO), and IOTA, were among the best-performing top-100 cryptocurrencies during the 15-day period ending Dec. 3. Some analysts have referred to this movement as the “dino coins rally,” as these altcoins have experienced at least two prior cycles of boom and bust.

What stands out about Cardano, aside from the impressive price gain, is the 37% increase in ADA open interest on derivatives exchanges, surpassing the previous peak from October 2022. The aggregate exposure of leveraged longs (buyers) and shorts (sellers) totaled 932.5 million ADA on Dec. 3, equivalent to $1.2 billion.

For comparison, the aggregate futures open interest for BNB stands at $1.08 billion, despite the BNB Chain market capitalization being more than twice the size of Cardano’s. Additionally, open interest in altcoins like Solana (SOL), Dogecoin (DOGE), and Avalanche (AVAX) remains below their previous all-time highs.

ADA futures reflect modest optimism and low liquidation risks

The surge in demand for ADA futures should not be viewed as inherently bullish or bearish, as these contracts have corresponding positions on the other side of the trade. To gauge traders’ sentiment, one should monitor the monthly futures contracts premium, also known as the basis rate. In healthy markets, annualized premiums between 5% and 10% are typical.

Cardano’s monthly futures contracts have been trading at a healthy 17% premium relative to the spot ADA price, consistent with previous bull markets and not considered unusual. During periods of excessive confidence, longs may pay up to 60% annualized for leverage, a significant cost for longer-term positions.

It is also important to consider the perpetual contracts. In these cases, exchanges charge either longs or shorts a fee for excessive leverage to balance risk. Given that crypto traders are typically bullish, a monthly fee ranging from 0.5% to 2.1% is generally charged to longs.

The ADA perpetual futures funding rate peaked at 6% per month on Dec. 2 and Dec. 3 but has since decreased to 2.2%. This suggests that traders initially used excessive leverage for a short period but subsequently deposited additional funds to mitigate risk.

Lastly, it is important to consider the total value locked (TVL) on the Cardano network, as increased demand for smart contract processing is a key factor driving sustainable ADA demand.

Cardano remains a relatively small player in the decentralized applications (DApps) ecosystem, with $685 million in deposits. In comparison, Aptos holds $1.23 billion in TVL, and Avalanche totals $1.53 billion. More notably, there has been no growth in Cardano’s TVL over the past few months.

Given the neutral-to-bullish funding rate and futures premium, there is no indication that the increased demand for ADA futures is the primary driver of the price surge. Therefore, there is no immediate risk of cascading liquidations.