Ethereum took a sharp downturn on February 3 and has struggled to hold on to the $2,800 level. This lackluster performance has left investors frustrated, raising doubts about the altcoins ability to regain bullish momentum.

However, the recent decline in exchange netflow on derivative platforms could offer a fresh opportunity for ETH.

Rally Setup?

CryptoQuants latest analysis revealed that Ethereums netflow on derivative exchanges has dropped below -300,000 ETH for the first time since August 2023. This significant outflow of ETH suggests several potential market shifts.

Firstly, reduced sell pressure is typically a bullish indicator. When ETH exits derivative exchanges, it often signifies traders are either closing leveraged positions or transferring their holdings to cold storage. This decreases, in turn, the immediate supply available for selling, which can support upward price momentum if demand remains stable or increases.

Secondly, such outflows can indicate market deleveraging. If caused by the liquidation of overleveraged long positions, this can create short-term volatility. However, this process often leads to a healthier market structure by flushing out excessive risk. On the other hand, if traders are de-risking by exiting positions, it may temporarily suppress buying demand before a new uptrend begins.

The current liquidation levels suggest that many short positions could face forced capitulation if ETHs price rises further, which would create the potential for a short squeeze that might drive prices even higher.

Additionally, the broader macroeconomic context is important. Federal Reserve net liquidity has risen from $5.85 trillion to $5.95 trillion. Higher net liquidity typically correlates with increased demand for risk assets like cryptocurrencies, as investors have more capital to deploy.

This combination of decreasing exchange netflow and improving liquidity conditions presents a compelling case for a bullish outlook on ETH in the near term.

Interest in ETH

Despite its recent struggles, buyer interest remains evident. Spot Ether ETFs and ETH purchases by Trump-linked World Liberty Financial highlight ongoing demand. Additionally, Cboe BZX Exchange has proposed options trading on spot Ethereum ETFs, following a similar move by NYSE American. If approved, investors could use options as a cost-effective tool for exposure and hedging in Ethereum-backed ETFs.

Meanwhile, popular crypto analyst Ali Martinez revealed that if ETH holds above $2,500, it could spark a significant rebound, potentially rallying toward $4,000 or even $6,000. This bullish scenario suggests that buyers may step in at this level, driving demand and triggering a sharp price recovery.

However, a failure to maintain $2,500 as support would shift the outlook bearish, with the next target dropping to $1,700. Such a decline could lead to increased selling pressure as well as market volatility as traders reassess the altcoins short-term trajectory.