Record Number of Leveraged Positions: What’s Next for Cardano?

Cardano jumped 88.8% between November 18 and December 3, reaching its highest price in almost three years at $1.33. This growth reflects the overall rise in the value of altcoins, which peaked at $1.52 trillion on December 3, compared to $1.16 trillion on November 18.

ADA’s 15-day rally was accompanied by a record number of leveraged positions via futures contracts, leading traders to question whether the drop to $1.16 on December 3 was a buying opportunity and to weigh the potential risk of sudden position closures due to insufficient margin.

Cardano, along with Stellar, XRP, Algorand (ALGO), and IOTA, were among the best-performing top 100 cryptocurrencies during the 15-day period ending December 3. Some analysts have dubbed this movement a “dino coins rally,” as these altcoins have experienced at least two previous boom-bust cycles.

What stands out for Cardano, aside from its impressive price rise, is a 37% increase in open interest for ADA on derivatives exchanges, surpassing the previous peak from October 2022. Total leveraged long (buyer) and short (seller) exposure stood at 932.5 million ADA as of December 3, equivalent to $1.2 billion.

For comparison, the total open interest in BNB futures contracts is $1.08 billion, even though the market cap of BNB Chain is more than double that of Cardano. Additionally, open interest in altcoins such as Solana, Dogecoin, and Avalanche remains below their previous highs.

ADA futures reflect moderate optimism and low risks of account closures due to insufficient margin availability.

The growing demand for ADA futures contracts should not be viewed solely as bullish or bearish, as these contracts have corresponding positions on the other side of the trade. To gauge trader sentiment, one should monitor the premium on monthly futures contracts, also known as the base rate. In healthy markets, annual premiums between 5% and 10% are typical.

Cardano monthly futures contracts are trading at a safe 17% premium to the spot price of ADA, which is consistent with previous bull markets and is not considered unusual. During periods of overconfidence, traders taking long positions can pay up to 60% annual interest for leverage, which is a significant price for longer-term positions.

It is also important to consider perpetual futures contracts. In these cases, exchanges charge a fee to long or short positions for excessive leverage to balance the risk. Given that crypto traders are typically bullish, the monthly leverage fee is typically between 0.5% and 2.1% for long positions.

The monthly funding rate for ADA perpetual futures contracts reached 6% on December 2 and 3, but then decreased to 2.2%. This indicates that traders initially used excessive leverage for a short period, but subsequently deposited additional funds to reduce risk.

Finally, it is important to consider the total value of funds blocked (TVL) on the Cardano network, as increased demand for smart contract processing is a key factor in the sustained demand for ADA.

Cardano remains a relatively small player in the decentralized applications (DApps) ecosystem, with $685 million in deposits. By comparison, Aptos holds $1.23 billion in TVL, and Avalanche has $1.53 billion. More importantly, there has been no increase in Cardano’s TVL over the past few months.

Given the neutral to bullish funding rate and futures premium, there is no indication that increased demand for ADA futures contracts is the primary driver of the price increase. Therefore, there is no immediate risk of cascading liquidations.