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How the Ethereum Merge was Actually Traded

Ethereum Merge trading

Traders were anticipating to “buy the rumour, sell the news” as a result of the highly-anticipated update, which happened successfully last week. Predictions were made correct – as the update turned out to be a “sell the news” event.

“Buy the rumour, sell the news” is a practice of trading where one buys an asset ahead of a major event, while expecting a price rise before selling the asset.

Crypto market intelligence provider Glassnode wrote “it is quite unsurprising that profits were taken where profits were available,” in its Monday report on the Merge. 

Glassnode had foresaw the selloff of ETH within Ethereum’s futures and options markets: according to Glassnode, prior to the Merge, ETH was one of the few assets that were performing well, despite bear market conditions, and a crypto winter.

It appears that the market had anticipated huge selloffs, and indeed ETH prices have sold off.   While September has been a historically weak month for crypto market prices, ETH transaction volumes have reached peak levels – all when recent market action leaves most major crypto assets in the perils of market volatility. 

From a weekly high of $1,777, shifting to $1,650 at the Merge this past Thursday, then a low of $1,288 Sunday, ETH prices have seen a huge jump right after the shift from PoW to PoS. Over this past week, the number two cryptocurrency by market cap has lost 25% of its market value.

Before the Merge, ETH had taken a hit last Wednesday, a day before the merge, where the US consumer price index recorded an 8.3% inflation rate – amongst record highs within the past forty years.

ETH has also reached an all-time low negative funding rate of 1,200% for traders seeking to keep their short positions, far surpassing the ~998% rate during the March 2020 ETH sell-off. Although now, Glassnode writes, “funding rates rates have since completely reverted to neutral, suggesting much of the short-term speculation premium has dissipated.”

In perpetual futures markets, funding rates are payments made regularly between traders who are speculating on the short-term future price of ETH. These payments are made so that the perpetual contract price is close in number to the price of the underlying asset.

Positive funding rates indicate that traders holding long positions are paying those with short positions, and that market attitudes are currently bullish about an asset’s future price. Negative funding rates show that shorts are paying longs, and that the market is suspecting that the crypto asset in question to drop.

The amount of outstanding future commitments on Ethereum, or Ethereum’s total futures open interest, fell a whopping 15% from $8 billion to $6.8 billion USD. However, it is unclear how much the decline is attributed to drops in ETH prices, as they impact the dollar value of ETH-dominated futures.

Futures open interest however are at an all-time high for ETH, increasing by almost 80% since early May, and have been continuing to rise over the past week. Glassnode suggests that this means that traders are still keen to keep on risk-hedging.

Call options – which are temporary guarantees that a trader can choose to buy a given asset at a predetermined price – for ETH fell by $600 million, a 10% decline, post-Merge. ETH call option position value now sits around $5.2 billion, which is “still much higher than 2021 norms.”  

Put options, temporary guarantees where a trader can choose to sell a given asset at a predetermined price have experienced a 19% drop, but are on a much smaller scale in net position value.

Glassnode notes that the ETH markets continue to “remain heavily utilised, levered up, and speculating on further upside, despite a -22% ETH price correction.” The Ethereum PoS network is now home to 429.6k Active Validators, with 14.586 million ETH staked – constituting 12.2% of the total ETH supply in circulation. 

As investors are still juggling on the implications of switching from PoW to PoS and what that means for staking and pooling, they now have a whole plethora of new supply dynamics to consider. With new sources of tension and market forces, validators adding issuance of the currency, and network congestion fee burns via EIP1559, it’s uncertain as to whether the supply of ETH can lean towards inflationary or deflationary. 

Although many have believed that the Merge will make Ethereum a faster and cheaper network, not much difference would be noticed for both end users and developers. It will only take time for the market to process and digest this new information, and it only has been one week since the Merge update has been shipped. 

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