The highly anticipated transformation of the Ethereum blockchain into a green new system has sparked a trading frenzy of hedge funds racing to bet ahead of one of the biggest events in cryptocurrency short history.
Traders collect options contracts for Ether – the main cryptocurrency traded on Ethereum – betting on price volatility or protecting themselves from sudden, sharp moves ahead of “the merge” or “merger” (the merging of the Ethereum blockchain with a system called the Baconchain to reduce energy consumption in the Ethereum blockchain). Industry).
The merger is a long-awaited event in the crypto space that will change how transactions are authenticated on the Ethereum blockchain.
Some traders are betting that switching to a new system will cut the grid’s power consumption by up to 99 per cent, opening up Ether tokens to mainstream investors who remain wary of a grid consuming nearly as much energy as Finland.
“This is one of the busiest trades in crypto history,” said James West, CEO of crypto derivatives exchange Globe Exchange.
Much of the trade was in the options market, with many predicting that the success of the turnaround would push up Ether prices.
Total options outstanding on Deribet, which account for 97 percent of open Ether options on the exchanges, rose from 1.2 million at the start of the year to more than 4.6 million last week.
About 80 percent of these contracts are call options – betting on a higher price where the investor has the ability to buy Ether at a fixed price for a specified period – while the rest are put options, or bets on lower prices. It’s a sign of “great bullish sentiment,” said Luke Strigers, Deribet’s chief commercial officer.
Some also believe that the merger could help Ether replace Bitcoin as the world’s largest cryptocurrency. The total value of bitcoin in circulation is $390 billion, compared to less than 200 billion for ether, according to the Financial Times’ Wilshere digital asset data panel.
“The mere expectation of Ether overtaking Bitcoin can become an unstoppable self-fulfiller,” said Anders Kvamie Jensen, director of AKJ Digital Asset Fund, who also added that the funds he invests in are betting on a consolidation using options.
At the same time, some investors were trading options to try to profit from the potentially large price volatility of the merger, regardless of whether the price movement was up or down, Strigers said.
But it is industry hype around the merger, with other traders devising strategies that bet that the price of Ether will rise sharply before the event, but sell lower if the merger does happen.
As a result, some bought short-term put options that would earn them if Ether reached $2,500 and funded that by selling longer-dated call options that would profit them if they hit $3,000, according to Ed Hindi, chief investment officer at hedge fund Tyre Capital.
However, trading did not go as expected. While the price of Ether rose from less than $1,000 in June to $1,600 last week, that is still somewhat less than what shorter-term options might pay. Fearing damage if Ether rises sharply after the merger, traders are rushing to cover their positions, Hindi said.
Hindi added that the market was “too bullish” before the merger, and “too bearish after the merger”.
Many investors who already own Ether have tried to protect themselves from selling at a low price if the merger does not work, for example if it is delayed or there are technical problems, by using futures contracts to bet that their price will go down. This type of trading, known as short selling, effectively protects traders from price movements.
The so-called funding rate, a measure of the direction of traders’ overall futures positions, in Ether hit its lowest level in more than a year, averaging minus 0.6 percent, according to Kaiko Research. This indicates that investors are focused on short selling.
Traders also hope that this Ether-holding bet while shorting the futures contract might enable them to earn more tokens, while protecting them from market volatility. Investors who hold Ether when the merger occurs are entitled to receive tokens that are still built on the legacy transaction processing system known as Proof of Work.
While the merger will turn Ethereum into a power-efficient Proof of Stake model, some market participants who are opposed to the change will continue to work on the legacy system — a fork — meaning that these coins may retain some value.
Jay Gunner, co-founder of KBTL Arbitrage Management in the Cayman Islands, is working on this trading because he thinks options trading has become too expensive. “If there is a drastic change in the network protocol, we will get free Proof of Work tokens,” he said.
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