Ethereum open interest hits 20-month high — Is this bullish or bearish for ETH?

Ether (ETH) surged 11.7% between Sept. 17 and Sept. 19, hitting a three-week high of $2,572. This price movement coincided with an uptick in Ether futures open interest, reflecting the total number of contracts on derivatives exchanges. As a result, traders are becoming wary that heightened leverage could amplify potential price fluctuations.

Lower interest rates favor ETH’s bullish momentum, but the US economy remains a risk

The recent ETH price rally mirrored the broader cryptocurrency market’s 8.3% gain, fueled by a combination of an interest rate cut in the United States and robust labor market data. This momentum also propelled the S&P 500 index to close at an all-time high on Sept. 19. Lower interest rates reduce the cost for companies to issue new debt, easing concerns over a potential stock market correction.

However, economists remain divided on whether the US Federal Reserve (Fed) is effectively balancing economic growth and recession risk, according to a report by Yahoo Finance. This ongoing uncertainty has left cryptocurrency investors cautious, questioning whether it’s too early to assess the success of the Fed’s monetary strategy.

On Sept. 20, FedEx shares plunged 15% following disappointing corporate earnings released a day earlier. CEO Raj Subramaniam attributed the earnings shortfall to a “weaker industrial economy” and inflationary pressures, which have led customers to shift away from priority shipping services, typically associated with higher fees. Subramaniam also cited a “challenging operating environment” impacting operational margins, as noted by Yahoo Finance.

Despite these broader macroeconomic concerns, Ether futures open interest spiked to 4.66 million ETH on Sept. 19, the highest level seen since January 2023, signaling strong demand for leveraged positions.

While the recent price gains clearly explain the rising interest in Ether leverage through futures contracts, they don’t necessarily indicate increased bullish sentiment among traders. In derivatives markets, every buyer (long) is matched by a seller (short), yet the level of demand for leverage fluctuates. This variance can be observed in the pricing of monthly ETH futures contracts.

ETH futures premium is stable amid increasing open interest

One might expect bullish sentiment to be the driving force behind the increased demand for Ether futures, but the data does not offer a conclusive view on this.

The ETH futures premium has remained relatively stable around 6% per year since August, slightly above the neutral 5% threshold. Traders generally require a premium to compensate for the longer settlement period in monthly contracts. During periods of heightened excitement, this indicator can easily surpass 10%, as was the case in late July.

This stability in the futures premium suggests there is little incentive for traders to engage in the ‘cash and carry’ strategy, which involves selling futures contracts while simultaneously buying ETH spot to capture the premium as a fixed-income trade. Therefore, we can infer there is a certain degree of genuine demand for bearish positions on Ether, as the futures premium has stabilized despite the recent price gains.

Related: Ethereum is a ‘contrarian bet’ into 2025, says Bitwise exec 

The current market conditions stand in stark contrast to late May when ETH rallied 28%, pushing futures open interest to 4.44 million ETH—just 5% below the current level. However, on May 31, the Ether futures premium surged to 14%, typically indicating excessive leverage demand from bullish traders. This time, the risk of cascading liquidations appears much lower, thanks to a more balanced distribution of leverage between long and short positions.

Currently, Binance and Bybit lead the Ether futures market with a combined open interest of $11.9 billion, controlling 30% and 17% of the market share, respectively. This concentration hints at significant retail demand, especially since OKX, Deribit, and the Chicago Mercantile Exchange (CME) collectively account for 24% of ETH futures open interest. 

Despite the rise in open interest, the lack of excessive leverage usage mitigates fears of heightened volatility in the near term.