Ether latest rally is being fueled by spot-market gains rather than by a build-up of leverage in the derivatives market, analysts said, potentially signaling that the price gains may have legs.

The second-largest cryptocurrency rose to a record high of $3,201 early Monday, making its year-to-date gain over 330%, according to CoinDesk 20 data.

“Ethereum’s funding rates remain flat and went negative early today on FTX,” Matthew Dibb, chief operating officer and co-founder of Stack Funds, said. “Our view is that the spot-driven rally for ETH is primarily due to excitement around the impending EIP 1559 upgrade.”

The funding rate, calculated and paid every eight hours, refers to the cost of holding long positions in perpetuals (futures with no expiry). A high funding rate implies increased buying in the derivatives market, which doesn’t appear to be the case with ether now.

Ether perpetual funding rate
Source: Glassnode

The average funding rate across major exchanges is barely holding above zero at press time, meaning the derivatives segment is far from overheated and the buying pressure is mainly stemming from spot markets.

An overheated derivatives market typically leads to sudden price pullbacks similar to ones seen in January and mid-February after the funding rate reached highs above 0.15%.

According to Swiss-based derivatives data provider Laevitas, the breakout above $3,000 could be long-lasting. “Despite ether flying past $3,000, funding rates are completely flat. So this certainly feels like a sustainable spot-led rally,” Laevitas tweeted early Monday.

Ki Young Ju, CEO of blockchain analytics firm CryptoQuant, said institutional buyers look to be accumulating the cryptocurrency. “Roughly 400,000 ETH flowed out of Coinbase a few days ago. Speculative guess, institutions are now buying ether,” Ju said on Twitter.

Coinbase outflows are taken to represent institutional buying, as the exchange’s custody wallets are directly integrated with its over-the-counter (OTC) desk. Institutions typically deal with OTC desks.

Some investors look to be betting on a continued rally toward $5,000. Among all the options listed on the dominant crypto exchange Deribit, the most common open position is the $5,000 call, data shared by the options analytics platform Laevitas shows.

Ether: open interest by strike
Source: Laevitas

The total open interest in the $5,000 call is 69,000 contracts at press time. Of that, 15,970 are due to expire at the end of May and 18,400 at the end of June.

A call option gives the purchaser the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date. In plain English, a call option is a bullish bet. The bullish sentiment likely stems from analysts predicting a considerable drop in ether’s annual issuance following the EIP 1559 upgrade – a proposal to change Ethereum’s fee structure, also known as “Ethereum’s scarcity engine” or “ETH’s burn mechanism”.

That said, the options market currently sees less than a 10% probability of ether ending the second quarter above $5,000, according to data source Skew. The cryptocurrency remains vulnerable to the effects of sharp bitcoin price pullbacks.

Also read: Ether Breaks Above $3K for the First Time Ever

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