Cardano Price Soars 88% — Is the ADA Rally Just Beginning?

Cardano (ADA) has experienced an impressive 88.8% surge in price from November 18 to December 3, reaching its highest value in nearly three years, peaking at $1.33. This rally mirrors broader gains in the altcoin market, which hit a peak market capitalization of $1.52 trillion on December 3, up from $1.16 trillion on November 18.

While this sharp price increase has sparked excitement, it also raises concerns about a potential sell-off due to record high open interest in ADA futures contracts. Traders are now debating whether the dip to $1.16 on December 3 presents a buying opportunity or if risks of cascading liquidations could loom over the market.

A Stellar 15-Day Performance

Cardano, along with other top-performing altcoins like Stellar (XLM), XRP, Algorand (ALGO), and IOTA, has been part of what some analysts are calling the “dino coins rally,” a reference to altcoins that have gone through multiple cycles of boom and bust. ADA was one of the standout performers in the 15-day period, with a surge in price that aligns with the broader altcoin rally.

However, what makes Cardano’s rally particularly noteworthy is its record-breaking open interest in leveraged futures positions. On December 3, the total exposure in leveraged longs (buyers) and shorts (sellers) reached 932.5 million ADA, valued at approximately $1.2 billion. This marks a 37% increase in open interest, surpassing the previous peak seen in October 2022.

For context, Binance Coin (BNB), with a market cap more than twice the size of Cardano’s, has a futures open interest of $1.08 billion. Yet, open interest in other altcoins such as Solana (SOL), Dogecoin (DOGE), and Avalanche (AVAX) remains well below their respective all-time highs.

ADA Futures and Market Sentiment

The surge in ADA futures positions is not necessarily an indicator of an impending bullish or bearish trend, as these contracts reflect corresponding positions on both sides of the trade. To understand the sentiment of traders, it's essential to monitor the monthly futures contracts premium, also known as the basis rate. In healthy markets, annualized premiums typically range from 5% to 10%.

As of now, Cardano’s monthly futures contracts are trading at a healthy 17% premium relative to the spot price, which is consistent with previous bull markets and not a cause for concern. During times of excessive market optimism, premiums can soar to as high as 60% annually, a significant cost for leveraged positions.

In addition to the futures premium, the perpetual contracts funding rate also provides insight into market sentiment. This rate fluctuates as exchanges charge either longs or shorts a fee for excessive leverage, helping to balance risk. Historically, crypto traders tend to lean bullish, so a monthly funding rate between 0.5% and 2.1% is common for long positions.

On December 2 and 3, the funding rate for ADA perpetual futures spiked to 6%, reflecting traders’ initial use of high leverage. However, this rate has since decreased to 2.2%, suggesting that traders quickly adjusted their positions and deposited additional funds to manage risk.

Cardano’s TVL and Sustainable Demand

Another critical factor to consider when evaluating the sustainability of Cardano's rally is the total value locked (TVL) in the Cardano network. TVL represents the demand for smart contract processing on the blockchain, which is a key driver of ADA’s long-term value. Currently, Cardano’s TVL stands at $685 million, a relatively modest figure compared to other smart contract platforms like Aptos ($1.23 billion) and Avalanche ($1.53 billion). More concerning, Cardano’s TVL has remained stagnant over the past few months, signaling limited growth in demand for decentralized applications (DApps) on the network.

Despite the neutral-to-bullish funding rate and healthy futures premium, the absence of significant growth in Cardano’s TVL raises questions about the long-term sustainability of the ADA price rally. While the futures market shows strong demand, the relatively low TVL suggests that Cardano's rally may not yet be driven by fundamental growth in the decentralized application ecosystem.

Conclusion

Cardano’s 88% price surge has generated considerable excitement, and the futures market indicates continued optimism among traders. However, the record open interest in ADA futures, coupled with stagnant growth in Cardano’s TVL, suggests that the rally may be more speculative than fundamentally driven. While the risk of cascading liquidations appears low for now, the future trajectory of ADA will likely depend on the continued expansion of Cardano’s ecosystem and the real-world demand for its smart contract capabilities. Until there is a significant uptick in TVL and adoption of Cardano’s decentralized applications, this rally may face challenges in maintaining its momentum.