Ethereum Faces Bearish Trends Amidst Potential Short Squeeze & Inflation Shift
  • October 6, 2023
  • Team Hongkong Journalist
  • 0

Ethereum has experienced a hostile bombardment in recent weeks, but a possible short-squeeze event may be ahead. The crypto community has expressed concern after reading’s tweet on the subject.

The tweet claims that “consistently negative funding rates can potentially trigger a cascade of short liquidations, which in turn could lead to a sudden price rebound.” The tip comes from trader Shayan, who hypothesises that a substantial price shift may be on the horizon.

One needs to study the future market to comprehend this forecast. The difference between continuous contract markets and spot pricing, which determines periodic payments to traders, has been negative for the Ethereum financing rates indicator. These dismal data indicate that futures traders are mostly bearish.

The negative financing rates suggest that traders expect greater price losses as Ethereum’s price consolidates after significant dips. However, the possibility of a brief squeeze is noteworthy.

Consistently negative funding rates can lead to a cycle of short liquidations. It may cause a sharp price recovery that catches bearish traders off guard and might even trigger a short squeeze, in which short sellers are compelled to repurchase their positions, further raising the price.

The Deflation to Inflation Switch in Ethereum

Aside from concerns about the near-term price, ETH has seen a change in its inflationary tendencies. According to recent data, Ethereum’s inflation rate is currently 0.270%, which is a significant departure from the deflationary trend seen earlier this year. Reduced network activity and lower on-chain fees, which have stopped base fee burning, are to blame for this shift.

Two significant events—the deployment of EIP-1559 (the London hard fork) and The Merge’s conversion from proof-of-work (PoW) to proof-of-stake (PoS)—were principally responsible for the shift from a deflationary to an inflationary trend. The fee-burning mechanism and PoS consensus in EIP-1559 have had a big impact on Ethereum’s issuance rate.

Ethereum has seen a considerable decline in transaction volume, with daily transactions reaching significant lows in the middle of the year and in the beginning of September. The lowest daily fees of the year were recorded on September 9 and 10, mirroring the decline in activity in network fees.

However, Ethereum is at a crossroads due to the risk of a short-squeeze and a move towards inflation. The adaptability of Ethereum and the endurance of the cryptocurrency market will be key factors in determining its future course.

- Published By Team Hongkong Journalist

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