Likelihood of Price Drop Rises as Cardano (ADA) Futures Positions Reach $1bln
Cardano’s ADA coin gained 816% this year, propelling the smart contract platform’s market capitalization to $61 billion. To get a sense of how much this third-generation protocol has progressed, consider that the smart contract pioneer, Ether (ETH), command same valuation only six months back.
If the price of AD changes, so do the options markets, and the approximately $1 billion in open futures interest represents a combo of advantage and a risk to the price. Cautionary buyers will now wonder if the $200 billion in future liquidations are on the horizon, drawing parallels to the April 17 plunge of 23 percent.
Decentralized finance (DeFi) has undoubtedly fueled the rise of concepts related cryptocurrencies, with Ethereum’s average fees soaring over $35 prompting investors to look for better substitutes. Cardano utilizes a proof-of-stake (PoS) protocol, but its “Goguen” upgrade, which will facilitate smart contracts and native token issue, is under development. The stock of ADA, which is presently 32 billion, is fixed at 45 billion.
The open interest on futures contracts reached $940 billion on May 13 after ADA hit an all-time peak of $1.97. This open interest value is remarkable given that ADA’s futures volumes rarely exceed $4 billion. The $195 million liquidation of long contracts on April 17 contributed to the 23% plunge that happened over four hours. A large open interest, on the other hand, cannot be identified as the major factor for spiraling liquidations.
The count of open futures contracts is validated by open interest, but these are often balanced between buyers (longs) and sellers (shorts) (shorts). As a result, the most aggressive liquidations happen when longs use undue leverage, and the funding rate is the best method to quantify this.
Inverse swaps are also referred to as perpetual contracts, and these contracts have a financing rate that changes once in eight hours. When (buyers) utilize more leverage, this fee rises, and their balances are gradually depleted. A fee of up to 5.5% per week is possible during a rise in retail interest.
Prior to the April 17 drop, the buyers’ leverage was underestimated, as seen in the chart provided above.
A financing rate of 0.30% per eight hours translates to 6.5% weekly, which is a huge encumbrance on those holding long positions. Such huge financing rates are not a norm and it did will not take much time to spark stop loss orders. That’s just what happened on April 17, when Bitcoin’s (BTC) price plummeted to $52,000, dragging the whole cryptocurrency sector down with it.
For most markets, though, the existing financing cost is close to zero, showing a balanced use of leverage on the buy and sale sides. Even though open interest is increasing, there are no indications that the derivatives market could spark an ADA price collapse.