The ETH futures market continues to be overwhelmingly dominated by perpetuals. The perp trading volume on Binance, for instance, is estimated to be ~1.46 million ETH versus only 102,840 ETH on the spot market, putting futures volumes about 14x as big. With all of that, it doesn’t mean the rally is going to fail and actually puts in doubt its underlying strength, given leverage can lead to drastic price movements in the absence of broad demand.
Ethereum trades at about $1,928. This digital asset continues to make gains in the first half of the week after recovering from the lows of early July. But ETH spot volume hasn’t kept pace with prices and the recent recovery appears to be driven more by derivatives than spot market buying interest. ETH spot volume needs to grow for sustained price upside.
The spot side is lagging behind from the perp volume
The volume imbalance indicator is around 0.868, indicating perpetual futures are still the dominant force for ETH volume and have been throughout the latest up and down trends, while spot volumes remained low. This creates a greater reliance on leverage, which can lead to drastic price moves when traders start exiting positions and there may be a rise in liquidations.
The low Z-score is not the depicting the elevated demand
The 30-day volume imbalance z-score is near -0.46. On its face, this suggests the distance between the amount of action happening on the perp market compared to spot is lower than the recent mean. The downturn in this metric, however, is not necessarily an indication that demand for spot is recovering.
We’ve seen a Z-score this high before, and these times were not necessarily characterized by a lack of subsequent volatility. Instead, the deficit widened back up rather than reverting into the sustained era of stronger spot engagement.
ETH recovery looks void until the spot confirmation
ETH has recovered from around $1,750 in early July to nearly $1,928. During this period, perpetual futures activity increased, but spot volume remained subdued. The market is moving higher, but much of the activity behind the move is coming from derivatives traders rather than investors buying ETH directly.
The condition is not implying that the market bulls do not exist but still there is no significant change in the spot demand. In the optimistic case, the ETH moves further up and spot activity grows in parallel with perp activity. Following this, a recovery would gain further conviction as investors would actually accumulate spot ETH, not the market taking part in overleveraging.
If perpetual volume continues rising while spot activity remains flat, the rally would remain more dependent on leverage and more vulnerable to sudden reversals.
A different scenario is being depicted from the calm spot market
Spot volume barely moved through any of Ethereum’s big swings this year, staying quiet through the April rally, the May drop, and the July recovery. That suggests long-term holders haven’t done much either way. No wave of spot buying pushed this recovery, but no wave of spot selling hit during the weak stretches either, so the real risk sits in the derivatives market, not with big holders exiting.
A steep snapback could happen if leveraged traders begin to get stopped out; however, it’s still not an indication that the greater structure is broken. A decline wouldn’t simply be with regard to leveraged market participants closing out their ETH positions, but it would require the spot holders to be doing so also. At the time of analysis, the data is not supporting this condition.
The rally still calls on bulls for the confirmation
The important thing will be to observe whether the volume begins to catch up with price; only then will we know that real demand is actually appearing in the market, rather than just a wave of leverage pushing prices up. At the moment it appears that Ethereum is simply catching its breath, with the price trying to rally while the spot volume does essentially nothing and perp volume is what is actually moving the market. That z-score dropping merely indicates that the discrepancy eased somewhat from where it had been. If we can begin to see spot volume begin to increase along with the price, then that would provide some substance for this rally, whereas if it continues to lag and perp volume remains elevated, the risk of a steep pullback will continue.
