CME ETH Futures Launch: Will a “Sell-the-News” Drop Happen?

The CME Ether futures contract is expected to launch today, Feb. 8, 2021. Many traders have anticipated a “sell-the-news” drop to occur because when the CME Bitcoin futures contract launched in December 2017, it marked the Bitcoin top.

Although there is a possibility that the launch of CME’s Ether futures contracts could cause a correction, several factors make it increasingly unlikely. 

Source: TradingView.com

Three reasons a sell-the-news drop might not happen

First, Ether has already weakened substantially since Feb. 6. Within the past two days, the price of ETH declined by over 15%. There is an argument to be made that this was a sell-the-news correction ahead of the CME listing.

Second, fund managers and investors are skeptical about the CME listing having the same negative impact it had on Bitcoin. Market dynamics have changed radically since 2017, with much higher institutional interest and overall liquidity in the cryptocurrency market.

With the demand for Ether continuing to increase due to the Eth2 launch and the explosive growth of decentralized finance (DeFi), the CME listing might not have a material impact on the short-term price cycle of ETH.

Wangarian, a capital allocator at Defiance Capital, the largest DeFi fund in Asia, said:

“Why are $ETH CME futures perceived as bearish for $ETH? Genuinely asking here – shouldn’t greater institutional access to ETH be bullish?”

Third, there is no quantifiable data to confirm that the 2017 CME Bitcoin listing caused the price of BTC to correct and, by relation, the entire cryptocurrency market pull-back. The two happenings coincided with one another, but it is difficult to prove that the CME listing was the main catalyst of the correction.

One could argue that the opening of CME Bitcoin futures market on Dec. 17, 2017 propelled Bitcoin’s momentum; the overly crowded futures market caused cascading liquidations, leading to sharp price drop.

Fundamentals are much stronger now

Atop the above-mentioned points, the fundamentals and on-chain data surrounding ETH are generally stronger than before.

According to the data from Defipulse.com, the total value locked across DeFi protocols is nearing a staggering $30 billion. This means that $30 billion in capital are being deployed across DeFi platforms, carrying out various operations such as yield farming, lending, liquidity providing, and more.

Ether is a direct bet on the DeFi market because it is used as gas across most major DeFi protocols. The term “gas” on the Ethereum network refers to transaction fees users pay to execute smart contracts. Since transaction fees are paid using ETH, when the user activity of DeFi is high, the demand for ETH also rises.

Data from CryptoQuant also shows that the exchange reserves of Ether has declined noticeably in the past six months. Since Eth2 was finalized, Ether reserves on exchanges depleted quickly, as users withdrew ETH from trading platforms to stake it in the Eth2 deposit contracts.

Source: CryptoQuant

Eth2 scales Ethereum by pivoting the network from mining to staking. It aims to switch Ethereum from the proof-of-work (PoW) consensus algorithm, which requires mining, to the proof-of-stake (PoS) algorithm, which eliminates mining.

When investors withdraw cryptocurrencies from exchanges, it typically signals an intent to hold for a long time. As an example, when large amounts of Bitcoin are withdrawn from Coinbase, on-chain analysts, like CryptoQuant CEO Ki Young Ju, consider it to be a bullish catalyst for Bitcoin.

With the lowest number of ETH across exchanges in history, the DeFi TVL rallying to a new all-time high, and the uncertainty on whether the CME listing catalyzed the 2017 Bitcoin top, a sell-the-news reaction from the CME Ether listing may not happen.

Cherry on the top: derivatives market is not crowded

Alongside the positive fundamentals, the Ether futures market has become less overheated after the correction in the past 24 hours.

The funding rate of the Ether perpetual swap contract has returned to 0.01%, which means the market is neutral and is no longer overcrowded.

Source: Skew

The average funding rate for perpetual swap contracts is 0.01%. When the rate is positive, buyers have to pay sellers a fee every eight hours. This mechanism is used to achieve balance in the market and ensure the market does not sway to one side for a prolonged period.

Since Ether futures contracts are generally less liquid than Bitcoin, the funding rate of ETH tends to be higher than Bitcoin. Hence, when the funding rate of ETH returns back to 0.01%, it means the market has fully reset.

A pseudonymous trader known as “Mac” said that with the ETH funding rate returning to 0.01%, “this week will be the week of alts.”

Investors in Ether and DeFi are also generally positive on the future of Ethereum and the long term trajectory of ETH regardless of the impact CME has on the price of ETH. David Lach, a cryptocurrency investor, wrote:

“No idea what will happen in the next few days/weeks now that we have $ETH futures on CME, but I remain incredibly bullish on the future of Ethereum and on $ETH the asset.”

In the past two days, the DeFi market saw a severe correction as a result of profits flowing from major DeFi tokens back into Bitcoin. But, as Bitcoin pulled back, the selling pressure on the DeFi market intensified, leading to a deeper correction.

If the DeFi market begins to recover in tandem with ETH, the momentum of ETH would likely strengthen as a result in the short term.