Author: Marcel Pechman, CoinTelegraph; Compiled by: White Water, Golden Finance

Between November 20 and 27, ETH surged 15%, approaching the $3,500 mark for the first time in four months. The rally coincided with Ethereum futures open interest reaching a record high, prompting traders to question whether rising leverage signals overly bullish sentiment.

Total open interest in Ethereum futures, ETH. Source: CoinGlass

In the 30 days ended November 27, total open interest in Ethereum futures climbed 23% to $22 billion. By comparison, three months ago on August 27, open interest in Bitcoin futures was $31.2 billion. Furthermore, when ETH was trading above $4,000 on May 13, ETH futures open interest was $14 billion.

Dominating the market are Binance, Bybit, and OKX, which together account for 60% of ETH futures demand. However, CME is steadily expanding its footprint. Notably, CME currently holds $2.5 billion in open interest in ETH futures, indicating increasing institutional participation — a development often seen as a sign of market maturity.

Whether it is institutional or retail investors, high demand for leverage does not necessarily indicate bullish sentiment. Derivatives markets maintain a balance between buyers and sellers, and they create opportunities for strategies to take advantage of various situations, including price drops.

For example, a cash arbitrage strategy involves buying Ethereum in the spot (or margin) market while simultaneously selling the same notional amount in Ethereum futures. Likewise, traders can take advantage of interest rate differences by selling longer-dated contracts, such as those expiring in March 2025, while buying shorter-term contracts, such as December 2024. These strategies do not reflect bullish sentiment, but will significantly increase the demand for Ethereum leverage.

Ethereum 2-month futures annualized premium. Source: Laevitas.ch

On November 6, the two-month ETH futures annualized premium (base rate) exceeded the 10% neutral threshold and has maintained a strong level of 17% over the past week . This rate allows traders to earn fixed returns while fully hedging their risk exposure through a cash arbitrage strategy. However, it is worth noting that some market participants accepted a 17% cost to maintain leveraged long positions, indicating moderate bullish sentiment in the market.

In a high-leverage environment, the greatest risk usually comes from retail traders, commonly known asCalled "degens," they often use leverage of up to 20 times. In this case, a standard daily price drop of 5% can wipe out the entire margin deposit and trigger the liquidation of the position. Between November 23 and 26, $163 million in leveraged long ETH futures positions were forced to be liquidated.

To measure the health of Ethereum retail futures positions, perpetual contracts are a key indicator. Unlike monthly contracts, perpetual contracts closely reflect the ETH spot price. They use variable funding rates — typically between 0.5% and 2.1% per month — to balance leverage between longs and shorts.

ETH perpetual futures 8-hour funding rate. Source: Laevitas.ch

Currently, the Ethereum perpetual futures funding rate is close to the neutral threshold, which is 2.1% per month. Although it briefly surged above 4% on November 25, it did not last. This shows that even with Ethereum prices rising 15% on a weekly basis, retail demand for leveraged longs remains subdued.

These developments reinforce the notion that rising Ethereum open interest reflects institutional strategies – such as hedging or neutral positions – rather than outright bullish sentiment.