Cardano (ADA) experienced a significant upswing of 88.8% between November 18 and December 3, reaching a nearly three-year high of $1.33. This surge coincided with broader gains in the altcoin market, which hit a peak of $1.52 trillion on December 3, up from $1.16 trillion on November 18.
The 15-day rally saw unprecedented levels of leveraged positions in ADA futures, raising questions among traders about potential buying opportunities and the risks of cascading liquidations.
During this period, Cardano, along with Stellar (XLM), XRP, Algorand (ALGO), and IOTA, topped the list of high-performing cryptocurrencies. This phase, referred to as the "dino coins rally" by some analysts, saw these altcoins navigate their third cycle of boom and bust. What sets Cardano apart is the substantial 37% rise in open interest on derivatives exchanges, surpassing the last peak from October 2022. The collective leveraged positions, both long and short, amounted to 932.5 million ADA, equating to $1.2 billion.
In a comparative light, the aggregate futures open interest for Binance Coin (BNB) stands at $1.08 billion, despite BNB’s market cap being more than twice that of Cardano. Further, open interest in other altcoins like Solana (SOL), Dogecoin (DOGE), and Avalanche (AVAX) remains below their past peaks. The demand for ADA futures suggests moderate optimism with limited risks of liquidation. These futures contracts, balanced by offsetting positions, do not inherently indicate market sentiment. Instead, the monthly futures contracts premium, or basis rate, should be observed. Normal markets see annualized premiums of 5% to 10%.
Cardano's futures contracts are currently trading at a robust 17% premium, aligning with previous bull markets. This is not unusual, as during periods of heightened confidence, traders pay as much as 60% annualized for leverage. Additionally, perpetual contracts—a mechanism where exchanges levy a fee on either longs or shorts for excessive leverage—come into play. Given the general bullish sentiment among crypto traders, longs typically incur a fee ranging from 0.5% to 2.1% monthly.
The funding rate for ADA perpetual futures peaked at 6% per month on December 2 and 3 but has since declined to 2.2%. This suggests traders initially overleveraged but later deposited additional funds to manage risks. Moreover, the total value locked (TVL) on Cardano's network is crucial, as increased smart contract processing demand drives ADA's sustainable demand. Cardano's TVL is $685 million, a modest figure in the decentralized applications (DApps) ecosystem, especially when compared to Aptos and Avalanche, which hold $1.23 billion and $1.53 billion, respectively. Notably, Cardano's TVL has stagnated recently.
Given the funding rate and futures premium, the heightened demand for ADA futures does not appear to be the main catalyst for the price increase. Thus, there is no immediate threat of large-scale liquidations.
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