In recent weeks, Ethereum has faced a bearish onslaught, but a potential short-squeeze event may be lurking on the horizon. CryptoQuant.com’s tweet on the matter has raised eyebrows in the crypto community.
According to the tweet, “Consistent negative funding rates can potentially trigger a cascade of short liquidations, which in turn could lead to a sudden price rebound.” The insight comes from trader Shayan, who suggests a significant price turnaround might be in the cards.
To understand this prediction, one must delve into the futures market. The Ethereum funding rates metric, which indicates periodic payments to traders based on the difference between perpetual contract markets and spot prices, has been negative. These negative readings signal a prevailing bearish sentiment among futures traders.
As Ethereum’s price undergoes consolidation after sharp declines, the negativity in funding rates implies that traders anticipate further price drops. However, a noteworthy aspect is the potential for a short squeeze.
A cascade of short liquidations can occur when consistent negative funding rates persist. It could result in an abrupt price rebound, catching bearish traders off guard and potentially leading to a short squeeze, where short sellers are forced to buy back their positions, further driving up the price.
Ethereum’s Shift from Deflation to Inflation
Apart from short-term price concerns, ETH has witnessed a shift in its inflationary dynamics. Recent data shows that Ethereum’s inflation rate stands at 0.270%, a notable change from the deflationary trend observed earlier this year. This shift can be attributed to decreased network activity and lower on-chain fees, which have curtailed base fee burning.
The transition from a deflationary to an inflationary trend was primarily driven by two key events: the implementation of EIP-1559 (London hard fork) and The Merge’s switch from proof-of-work (PoW) to proof-of-stake (PoS). EIP-1559’s fee-burning mechanism and PoS consensus have significantly influenced Ethereum’s issuance rate.
In terms of transaction activity, Ethereum has experienced a noticeable lull, with daily transactions hitting significant lows in mid-year and early September. Network fees have mirrored this reduced activity, with September 9 and 10 registering the lowest daily fees of the year.
Nevertheless, Ethereum finds itself at a crossroads with potential short-squeeze risks and a shift towards inflation. The crypto market’s resilience and Ethereum’s adaptability will play crucial roles in determining its future trajectory.
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