Analysis of the Ethereum derivatives market reveals that crypto traders are getting ready to “buy the rumor and sell the news” in anticipation of the “merge,” a long-awaited Ethereum network upgrade.
According to the blockchain intelligence company Glassnode, this is the case. The company earlier reported “backwardation” across the board for both ETH options and futures moving into September, which is the month in which the merge is anticipated. When prices for an asset in the futures market are lower than the asset’s underlying spot price, this is referred to as “backwardation.”
The report also shows that it is easy to see the directional bias of Ethereum traders if one looks at the September contracts on Deribit, a cryptocurrency derivatives market. With traders wagering on ETH prices over $2.2k and a substantial open interest up to $5.0k, call options outweigh put options in size.
A trader has a temporary assurance in the form of a call option that they may acquire a certain asset at a fixed price if they so choose. A put option is the same thing as a call option, only it allows the holder to sell an asset instead. According to Glassnode, the fact that there is such an overwhelming desire to acquire calls at a premium indicates a “state of severe bullish bias” for the price of ETH in September.
This trend, however, experiences a dramatic reverse in October, when it seems that demand for ETH options is declining. ETH’s implied volatility, a statistic that quantifies the market’s expectations of an asset’s future price, is considerably greater on downside price forecasts than on upside price predictions. This is because negative price predictions tend to be more accurate. According to Glassnode, traders are “paying a premium for ‘sell-the-news’ put option protection post-merge.
Open interest in Ethereum options is now around $6.6 billion, making it the first time in history that it is more than open interest in Bitcoin options, which is currently worth $4.8 billion. According to the report, there isn’t much of a trend in the bitcoin futures markets right now.
Following the announcement that Ethereum developers are now optimistic that the merge will take place on or around September 19, the price of ETH skyrocketed. The term “merge” refers to a change in the protocol that will join the existing proof-of-work Ethereum mainnet with the proof-of-stake beacon chain. This change will take place in the future. As a result, the merge is the very last step that has to be taken to complete Ethereum’s long-awaited transition to proof of stake successfully.
The current network, which is prone to congestion and has prohibitively expensive transaction fees, is expected to become faster and more scalable after implementing this upgrade, also known as “Ethereum 2.0.” As a result of the change, mining Ethereum will no longer be possible. Instead, network users will be required to “stake,” or pledge, their current ETH to the network for new ETH coins to be generated and distributed as a reward for their staking efforts.
The adjustment is expected to have a deflationary effect on the cryptocurrency as a result of this action because it will significantly slow down the rate at which new ETH is generated and distributed. Additionally, if there is an ongoing strong demand for the cryptocurrency, this may result in a price increase for the cryptocurrency. BitMEX co-founder Arthur Hayes claimed on Thursday that this phenomenon would help “push the price of ETH up tremendously,” perhaps to $5,000 by March of 2023. This prediction was made in a blog post that was published on Thursday.