An analysis said the market environment for further gains in Ethereum is becoming more stable as overheating in its derivatives market cools.

On May 11, blockchain outlet The Crypto Basic cited CryptoQuant analyst Darkfost as saying excessive leverage use has fallen noticeably, with Ethereum moving between $2,250 and $2,450 for nearly a month.

Darkfost said derivatives trading surged after Ethereum rebounded about 33 percent from its February low, and open interest rose by about $4.5 billion. Binance's estimated leverage ratio in particular jumped to 0.76 on March 16. The indicator shows how much leverage traders use relative to exchange holdings, and the higher it rises, the greater the potential for market risk and volatility to increase.

But the ratio has now fallen sharply to 0.57. The timing coincides with Ethereum again testing resistance at $2,450. Darkfost said, "A decline in leverage is not necessarily a bearish signal," adding that it could instead make the market more stable at an important point in the price move.

The reasons for the drop in leverage are also relatively clear. Many long positions that had built up on expectations of a breakout were quickly closed when Ethereum slid to around $2,350. Short positions that had accumulated earlier were also voluntarily unwound or forcibly liquidated during the rise. It means the burden on the derivatives market has eased as excessive directional bets declined on both sides.

Futures market sentiment has also shifted somewhat. During the previous upswing, funding rates generally stayed negative. That meant many participants still leaned bearish even as prices rose. Recently, however, funding rates have broadly turned positive. Darkfost said that showed long positions have regained leadership across the derivatives market.

Still, Darkfost said improved derivatives indicators alone are not enough to clearly break through resistance at $2,450. To move out of the price range that has continued for more than a month, Ethereum needs spot demand to follow.

Ethereum's relative weakness has also been seen in recent fund flows. XWIN Research said in a report last week that Bitcoin's rebound since April was based on strong institutional demand. Bitcoin rose more than 11 percent, while Ethereum gained 7.28 percent. Bitcoin was supported by institutional buying, including Strategy purchases of more than $4 billion and ETF inflows led by BlackRock of $1.197 billion.

By contrast, Ethereum's ETF inflows were $356 million, well below Bitcoin's roughly $3 billion. XWIN Research said money is moving more selectively into assets with stronger demand. It said Ethereum and other altcoins need sustained inflows to keep pace with Bitcoin.

Ultimately, the key question in the current Ethereum market is whether spot buying follows after the derivatives market shakeout. Cooling derivatives overheating signals reduced volatility pressure, but whether Ethereum breaks $2,450 and forms a subsequent trend will likely be decided by a recovery in spot demand.

ETH Derivatives Activity Cools Down Ahead of Potential Breakout “ETH’s Estimated Leverage Ratio on Binance has sharply declined to 0.57 while ETH was once again testing its ~$2,450 resistance… Lower leverage tends to stabilize the market, especially while ETH is attempting to… pic.twitter.com/fDX2D1QuOY