Ether (ETH) price has declined by 14.7% since its peak at $2,120 on April 16, 2023. However, two derivatives metrics indicate that investors have not felt this bullish in over a year. This discrepancy warrants an investigation into whether the recent optimism is a broader response to Bitcoin (BTC) breaking above $34,000 on Oct. 24.

One possible reason for the surge in enthusiasm among investors using ETH derivatives is the overall market's excitement regarding the potential approval of a spot Bitcoin exchange-traded fund (ETF) in the United States. According to analysts from Bloomberg, the ongoing amendments to the spot Bitcoin ETF proposals can be seen as a “good sign” of progress and impending approvals. This development is expected to drive the entire cryptocurrency market to higher price levels.

Interestingly, comments issued by the U.S. SEC Chair Gery Gensler's in 2019 reveal his perspective. During the 2019 MIT Bitcoin Expo, Gensler termed the SEC's position at the time as "inconsistent" because they had denied multiple spot Bitcoin ETF applications, while futures-based ETF products that do not involve physical Bitcoin had been in existence since December 2017.

Another potential factor in the optimism of Ethereum investors using derivatives may be the pricing of the Dencun upgrade scheduled for the first half of 2024. This upgrade is set to enhance data availability for layer-2 rollups, ultimately leading to reduced transaction costs. Moreover, the upgrade will prepare the network for the future implementation of sharding (parallel processing) as part of the blockchain's "Surge" roadmap.

Ethereum co-founder Vitalik Buterin highlighted in his Oct. 31 statement that independent layer-1 projects are gradually migrating and potentially integrating as Ethereum ecosystem layer-2 solutions. Buterin also noted that the current costs associated with rollup fees are not acceptable for most users, particularly for non-financial applications.

Challenges for Ethereum competitors

Ethereum competitors are facing challenges as software developers realize the associated costs of maintaining a complete record of a network's transactions. For instance, SnowTrace, a popular blockchain explorer tool for Avalanche (AVAX), announced its shutdown supposedly due to the high costs.

Phillip Liu Jr., head of strategy and operations at Ava Labs, pointed out the difficulties users face in self-validating and storing data on single-layer chains. Consequently, the substantial processing capacity required often leads to unexpected issues.

For example, on October 18, the Theta Network team encountered a "edge case bug" after a node upgrade, causing blocks on the main chain to halt production for several hours. Similarly, layer-1 blockchain Aptos Network (APT) experienced a five-hour outage on October 19, resulting in a halt in exchanges' deposits and withdrawals.

In essence, the Ethereum network may not currently offer a solution to its high fees and processing capacity bottlenecks. Still, it does have an eight-year track record of continuous upgrades and improvements toward that goal with few major disruptions.

Assessing bullish sentiment in ETH derivatives markets

After evaluating the fundamental factors surrounding the Ethereum network, it's essential to investigate the bullish sentiment among ETH traders in the derivatives markets, despite the negative performance of ETH, which has dropped 14.7% since its $2,120 peak in April.

The Ether futures premium, which measures the difference between two-month contracts and the spot price, has reached its highest level in over a year. In a healthy market, the annualized premium, or basis rate, should typically fall within the range of 5% to 10%.

Such data is indicative of the growing demand for leveraged ETH long positions, as the futures contract premium surged from 1% on Oct. 23 to 7.4% on Oct. 30, surpassing the neutral-to-bullish threshold of 5%. This surge in the metric follows a 15.7% rally in ETH's price over two weeks.

Analyzing the options markets provides further insight. The 25% delta skew in Ether options is a useful indicator of when arbitrage desks and market makers overcharge for upside or downside protection. When traders anticipate a drop in Ether's price, the skew metric rises above 7%. Conversely, phases of excitement tend to exhibit a negative 7% skew.

Related: 3 reasons why Ethereum price is down against Bitcoin

Notice how the Ether options 25% delta skew reached a negative 16% level on Oct. 27, the lowest in over 12 months. During this period, protective put (sell) options were trading at a discount, a characteristic of excessive optimism. Moreover, the current 8% discount for put options is a complete turnaround from the 7% or higher positive skew that persisted until Oct. 18.

In summary, the drivers behind the bullish sentiment among Ether investors in derivatives markets remain somewhat elusive. Traders may be expecting approval for Ether spot ETF instruments following Bitcoin's potential approval, or they may be banking on planned upgrades that aim to reduce transaction costs and eliminate the competitive advantage of other blockchain networks like Solana (SOL) and Tron (TRX).

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.