Bitcoin and Ethereum appear to be trading in overbought territory as their funding rates have significantly grown over the past few days. The current market conditions point to a temporary correction in the near term before higher highs.
Bitcoin Looks Set to Retrace
Bitcoin and Ethereum could be set for a brief correction.
Speculation is mounting around the leading cryptocurrency with the first Bitcoin futures ETF due to launch on the New York Stock Exchange Tuesday.
Data from on-chain intelligence platform Glassnode shows that the total amount of funds allocated in open Bitcoin futures contracts is climbing at an exponential rate. More than $23 billion has entered the market through derivatives platforms, representing a five-month high.
Investors appear to be in “extreme greed” mode about a potential price breakout toward a new all-time high of $90,000 once the Bitcoin futures ETF launches. However, the network activity suggests that BTC could pull back before it reaches a new milestone.
The number of new daily BTC addresses created on the network appears to be forming a bearish divergence against prices. While Bitcoin rose from $54,000 to nearly $63,000 between Oct. 7 and Oct. 15, the number of new daily BTC addresses dropped from 504,000 addresses to 474,000 addresses. Such market behavior suggests a decrease in user adoption over time, which is a bearish signal.
Network growth is considered one of the most accurate price predictors for cryptocurrencies. Generally, a steady downtrend in the number of new addresses created on a given blockchain leads to declining prices over time.
Bitcoin’s realized price distribution shows the amount of BTC last moved at each denominated price level. Currently, only 1.66% of the supply last moved above the current price levels.
Although this means there is very little resistance or overhead supply to the upside, it also reveals that the incentive to sell is growing. As almost 350,000 BTC were acquired around $56,000, this could be a strong foothold that holds in the event of a correction.
Ethereum Could Follow Bitcoin
Similar to Bitcoin, Ethereum’s perpetual swaps funding rates indicate that investors might be getting overconfident about the future price action.
The second-largest cryptocurrency by market cap has enjoyed favorable funding rates since the beginning of the month. Such market behavior suggests that speculators are growing optimistic as long traders pay short traders’ funding.
Although Ethereum is yet to see funding rates of 0.1% or higher every eight hours, the steady increase in this metric can be considered a warning signal for a potential correction.
The declining number of active addresses on the Ethereum network also indicates that a correction could be looming. A spike in network activity usually determines an influx of buyers. On the other hand, when this on-chain metric trends down, it indicates less interest from retail investors, which leads to less volatility or price retracements.
If this trend continues, Ethereum could drop toward $3,400 or even $3,200 before the bull run resumes.
It is worth noting that more than $30 billion worth of Ethereum has been put out of circulation since the launch of the ETH2.0 deposit contract and the London hardfork. Meanwhile, the exchange supply continues to decline, hitting a three-year low of 15 million ETH recently. Such network dynamics point to an impending supply shock that could see ETH outperform BTC the coming months. If Ethereum maintains bullish momentum, a decisive close above $4,000 could lead to a rise toward a new all-time high of $6,000.
Disclosure: At the time of writing, the author of this feature owned BTC and ETH.