Ethereum Slides to 13-Month Low as Derivatives Turn Bearish and Zcash Bug Stokes Contagion Fears

Meta Description: Ethereum drops to a 13-month low as funding turns negative and options skew jumps; Zcash bug and falling TVL deepen risk for ETH and DeFi.

Ether (ETH) slumped to a 13-month low around $1,540 on Friday as a wave of forced deleveraging swept through crypto markets, flipping key derivatives gauges decisively bearish and curtailing an attempted rebound. Sentiment deteriorated further after disclosure of a critical vulnerability in Zcash’s shielded pool, which raised the specter of contagion into other zero-knowledge systems and coincided with a fresh contraction in Ethereum’s total value locked (TVL). The combination of stressed positioning, security concerns and on-chain outflows left traders bracing for deeper downside risk.

Market Movement

ETH’s decline extended a broader crypto pullback and left the asset trading roughly 67% below its August 2025 all-time high, according to the source. The slide gathered speed into the end of the week as liquidations mounted, with leveraged long positions bearing the brunt of the selling pressure. Over a five-day stretch, an estimated $1.28 billion in bullish ETH bets were wiped out, including more than $500 million over 48 hours, underscoring the fragility of positioning when spot prices breach widely watched support levels.

The breach of the $1,550–$1,600 area cut off a short-lived relief bounce and encouraged momentum sellers to press the move. With little evidence of dip-buying conviction, market participants pointed to the risk of another leg lower should liquidity thin out into the weekend and funding remain skewed against longs. The source noted that ETH could slide further below $1,550 if confidence continues to erode.

Trading Activity

Derivatives markets reflected the shift in tone. The annualized funding rate on ETH perpetual futures turned negative on Friday, a sign that short positioning had grown dominant as traders paid to maintain bearish exposure. Periods of sustained negative funding often coincide with declining spot prices and can amplify drawdowns when liquidation thresholds are clustered nearby.

Options activity echoed the defensive stance. On Deribit, the premium for puts over calls spiked, with the put-to-call premium ratio rising to about 3.7 times on Friday, based on the source’s reference to Laevitas data. Elevated demand for downside hedges typically surfaces when investors either seek protection into volatility or position for further weakness. The persistent skew toward puts since Monday suggested that the market’s base case had shifted from neutral to overtly risk-off.

Mechanically, the twin signals—negative funding and a put-heavy options surface—tend to reinforce one another. Higher put demand lifts implied volatility on the downside, which can widen hedging flows from options market makers. At the same time, negative funding discourages leveraged longs from re-entering quickly, slowing any rebound as forced sellers unwind into thin liquidity. This feedback loop was evident as cascading liquidations accelerated into price breaks and intraday recoveries faded.

Investor Sentiment

On-chain metrics added to the caution. Ethereum’s TVL fell to its lowest reading since February 2024, signaling reduced capital committed to decentralized applications. In practice, a shrinking TVL pressures protocol fee generation and token utility, which can dampen demand for ETH used to pay gas and interact with smart contracts. Several high-profile applications saw pronounced drawdowns, including Spark (-50%), Ether.fi (-49%), EigenCloud (-41%) and KernelDAO (-39%), according to the source’s DefiLlama snapshot.

Beyond TVL, holder profitability deteriorated meaningfully. Only about 30% of ETH supply remained in profit relative to the last time those coins moved on-chain, per Glassnode metrics cited by the source. That profile has been rare historically, appearing during stressed regimes such as the March 2020 COVID crash and late 2019, when capitulation dynamics briefly overwhelmed spot markets. While some traders view such extremes as fertile ground for medium-term recoveries, the signal’s timing is uncertain and typically depends on macro liquidity, positioning and the resolution of proximate risk events.

Broader Market Context

Security concerns magnified near-term fragility. A critical vulnerability was discovered in Zcash’s largest zero-knowledge pool, one that could have permitted unlimited ZEC minting, according to the source. The flaw, which reportedly dated back to 2022, was identified on May 29 using Anthropic’s Opus 4.8 AI model. Although the issue relates specifically to Zcash’s shielded pool design, the revelation stirred broader anxiety that other zero-knowledge systems or smart contracts might harbor undiscovered bugs that could be surfaced as AI-assisted security tooling improves.

Risk appetite had already been frayed by a spate of security incidents. The source referenced roughly $630 million in crypto-related losses in April tied to hacks and compromises, with KelpDAO’s $293 million breach and Drift Protocol’s $280 million exploit accounting for the bulk of the damage across 25 affected protocols. Those events spanned multiple chains, including Ethereum, Solana, Base, BNB Chain, Sui and PulseChain, highlighting the cross-ecosystem nature of attack surfaces and the challenges of securing rapidly evolving DeFi infrastructure.

Investors tend to respond to security shocks by withdrawing liquidity from complex on-chain strategies, tightening risk budgets and reducing leverage. The combination of an AI-discovered vulnerability in a major privacy protocol and elevated exploit tallies reinforced that pattern. As capital pulled back from yield strategies and leveraged basis trades, spot liquidity thinned and the market became more sensitive to directional flows from liquidations and hedging.

Industry Impact

The pullback rippled into balance-sheet considerations for large ETH holders. According to the source, the largest Ethereum treasury firm, Bitmine (BMNR US), was sitting on an unprecedented $10.5 billion unrealized loss and holds about 4.5% of the total ETH supply. Concentrated treasuries can act as focal points for market narratives during drawdowns: investors watch for signs of forced selling, hedging or changes to treasury policy that might alter supply–demand dynamics at the margin. Even absent immediate flows, headline sensitivity around large holders can influence price discovery when liquidity is impaired.

The retreat in TVL and revenue also affects protocol roadmaps. Projects that rely on issuance or fee capture to fund development may face tougher choices on incentives, liquidity mining and grants as treasury values fall. That dynamic can slow the cadence of feature launches or integrations, which in turn may delay the catalysts that often help restore user confidence after drawdowns. In staking-linked businesses, lower token prices can widen unbonding risk if validators or liquid staking participants seek to de-risk, potentially nudging staking yields higher relative to price but tightening collateral conditions across DeFi.

For centralized venues and market makers, the shift in derivatives structure alters hedging costs and inventory management. Negative funding increases the carry cost for maintaining long inventory hedged with perpetual shorts, while a put-heavy options surface can change the economics of providing two-sided liquidity in options books. These frictions can reduce displayed depth during stress windows and contribute to slippage on large orders, perpetuating cautious behavior among systematic and discretionary traders.

What This Means for Crypto Markets

The current setup reflects three intersecting forces: deleveraging pressure in derivatives, security-driven risk aversion on-chain, and low realized profitability among long-term holders. Each can self-correct over time, but in the near term they lean in the same direction. If funding remains negative and options skew stays defensive, rallies may stall as hedged sellers fade strength and as liquidity providers maintain wider spreads. Conversely, a stabilization in on-chain security headlines and a leveling in TVL could reduce the impetus for defensive positioning, opening scope for mean reversion in derivatives and a modest improvement in depth.

Investors tracking historical analogs to prior periods when only a minority of supply sat in profit should note the conditional nature of those comparisons. Previous rebounds followed capitulation episodes that coincided with policy easing, macro risk stabilization or idiosyncratic crypto catalysts. Today’s drivers center on security revelations and the aftershocks of leveraged positioning, which may require clearer resolutions—software patches, audits, incident forensics and measured re-engagement of capital—before risk appetite normalizes. As a result, timing remains the key uncertainty.

From a portfolio standpoint, drawdowns of this kind often lead to dispersion. Assets with simpler security models or clearer revenue links can outperform broader baskets during repair phases, while protocols exposed to elevated smart contract complexity or ongoing audits may underperform until vulnerabilities are definitively addressed. For traders, term structure in both funding and implied volatility can present tactical opportunities: persistent negative funding may compress if short interest peaks, and steep downside skew can normalize if hedging demand ebbs, but both shifts typically require a catalyst that reduces uncertainty rather than just time passing.

Broader Market Context

Macro conditions still frame the backdrop. While the source material focuses on crypto-native drivers, the sensitivity of digital asset flows to dollar liquidity, rates expectations and cross-asset volatility remains elevated. In stressed regimes, correlations within crypto tend to rise, diminishing diversification across tokens and reinforcing the role of market-wide liquidity. Against that backdrop, security narratives can exert outsized influence because they affect both micro-level confidence in specific protocols and the willingness of allocators to deploy risk capital across the sector.

The episode also underscores the growing role of AI in security research. The Zcash vulnerability was reportedly identified using an AI model, and the mere possibility that similar tools can surface latent flaws has changed the perceived risk distribution. For teams building privacy tech and zero-knowledge systems, investment in formal verification, adversarial testing and layered defense will likely command greater resources. For investors, more rigorous diligence around audit scope, circuit design and upgrade pathways may become a baseline requirement before committing liquidity.

Trading Activity

In the near term, market structure bears watching:

• Funding and basis: Sustained negative funding indicates an imbalance favoring shorts in perpetual swaps. If the cash-and-carry basis narrows or inverts, it often signals caution among arbitrageurs and a reduced incentive to warehouse spot inventory.
• Options skew and term: Elevated put premiums at the front end suggest immediate hedging demand. A flattening of the term structure or a shift toward call demand can be an early sign that positioning is less one-sided.
• Liquidation clusters: As spot trades through prior liquidation bands, the density of forced selling can diminish. A migration of liquidation levels lower may reduce the intensity of future cascades, though it can also cap rebounds if new shorts rebuild.
• Liquidity pockets: Depth near round numbers frequently becomes focal during stress. Slippage and order book gaps around those levels can exacerbate moves, particularly during off-hours.

None of these indicators offer timing precision, but together they map the contours of downside risk and the conditions under which stabilizations have taken hold in past episodes.

Industry Impact

For developers, the week’s events revive debates about composability risk—the extent to which one protocol’s vulnerabilities can propagate through dependencies and liquidity interlinks. Protocols that emphasize modular isolation, strict permissions and staged rollouts may find renewed favor among risk-sensitive users. Insurance primitives and risk transfer mechanisms, while still maturing, can also see increased adoption as users look to manage tail events.

For institutions exploring on-chain finance, the drawdown and security headlines reinforce the importance of segregation, monitoring and incident response planning. Custodial segregation, multi-party computation arrangements and real-time anomaly detection are becoming table stakes. Post-incident transparency and verifiable remediation will influence how quickly sidelined capital returns after shocks.

Investor Sentiment

The psychological toll of repeated liquidations is visible in the options market’s defensive skew and the persistent negativity in funding. Retail and smaller funds often reduce activity after consecutive losses, which lowers liquidity and can create outsized price impact from relatively modest flows. Larger players may step back until hedging costs ease or until catalysts emerge—such as completed audits, protocol upgrades or signs that forced sellers have exhausted supply. The source’s observation that only 30% of supply is in profit captures this wariness: when unrealized losses dominate, time horizons shorten and risk budgets contract.

What This Means for Crypto Markets

Put together, the picture is one of a market in risk management mode. The path to stabilization likely runs through three checkpoints: containment of security concerns, a break in the liquidation cycle, and signs of on-chain re-engagement. Clear communication from affected projects, demonstrable fixes, and external verification can help with the first. Thinner liquidation bands and less one-sided derivatives metrics address the second. A turn in TVL trends, even marginally, would assist the third by signaling that users are returning to protocols in search of utility rather than simply yield.

Until then, price action may remain headline-sensitive. Moves that might otherwise fade can extend if they align with existing positioning imbalances, while positive developments may struggle to gain traction without corresponding shifts in derivatives or on-chain flows. This asymmetry tends to persist until new information materially changes risk perceptions.

Conclusion

Ether’s drop to a 13-month low crystallized several pressures at once: deleveraging in derivatives, a slide in Ethereum-focused on-chain activity and a fresh reminder of security risk following the Zcash vulnerability disclosure. With funding negative, options skew elevated and only a minority of supply in profit, the near-term setup remains cautious. The source material points to the possibility of further slippage if confidence continues to falter and highlights the role that security events and TVL dynamics now play in shaping price discovery.

Stabilization is possible once liquidation intensity fades and security narratives find resolution through patches and audits. Until then, positioning and liquidity will anchor trading, and headlines around vulnerabilities or large treasuries may steer intraday direction. For now, crypto markets are signaling a preference for defense, and Ethereum—as the sector’s largest smart contract platform—sits at the center of that recalibration.