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Derivatives Expert Cautions on Ether’s Perpetual Futures Market Risks

Ether’s perpetual futures funding rates have skyrocketed, hitting levels not seen since before August’s global liquidation bloodbath. Back then, major cryptos, including Bitcoin and Ether, nosedived over 20%, mirroring the collapse of stock markets. Now, Gordon Grant, a well-seasoned derivatives trader, is raising the red flag. He warns the crypto market is tiptoeing on the edge, vulnerable to sell-offs driven by over-leveraged positions.

Funding Rates Signal Trouble Ahead

According to Coinglass data, the OI-weighted funding rate is sitting at 0.0116%, the highest since late July when Ether was trading at $3,316. That was before the 22% drop in early August, when a global stock market rout kicked in after the Bank of Japan blindsided the market with an interest rate hike. While that crash had its roots in the stock world, Grant thinks the over-leveraged state of crypto’s linear derivatives futures market poured gasoline on the fire.

“The structure of participants in the perpetual futures market suggests weakness,” Grant explained. He emphasized that another external shock, much like August’s yen-carry trade debacle, could easily trigger a similar liquidation event.

Macro and Technical Headwinds Combine

But it’s not just crypto’s internal leverage problem. Grant noted that investors are growing jittery over potential dips in Nvidia’s stock and other high-flying chip stocks. China’s once-hot stock rally has cooled, and ongoing tensions in the Middle East add more uncertainty. These macro factors, combined with leverage sitting on a knife’s edge in the crypto market, could ignite another downturn.

Grant pointed to risks surrounding large long positions in perpetual futures. “We could see outsized liquidations, as happened in August,” he warned, describing how ether overwriters hedging with long futures triggered extreme market moves back then.

DeFi Lending and Market Dynamics

Adding to the complexity, Ethereum’s on-chain activity is buzzing with new DeFi protocols like Ethena attracting users. But strategies like Ethena’s, which farm stablecoins and hedge risks with perpetuals, could get crushed if funding rates turn negative. Massive positions could spiral out of control, creating even sharper price drops.

Grant also flagged a crucial difference between CeFi and DeFi lending markets—DeFi lacks the large blocks of coins for shorting futures, which could make these market downturns longer and uglier than in traditional finance.