Home Stock Market Updates Derivatives suggest a ‘sell-the-news’ end to Ethereum rally

Derivatives suggest a ‘sell-the-news’ end to Ethereum rally

Chaz Cutler Aug 12, 2022 comments off

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Ether is surging in anticipation of a groundbreaking software update to its blockchain. Sophisticated traders are positioning themselves for the rally to continue until that happens, and after the cryptocurrency plummets.

Bloomberg news

Vildana Hajric and Olga Kharif

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(Bloomberg) — Ether is surging in anticipation of a groundbreaking software update to its blockchain. Sophisticated traders are positioning themselves for the rally to continue until that happens, and after the cryptocurrency plummets.

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Speculators in the derivatives markets are collecting call options to bet on an Ether advance in September, when the upgrade is supposed to happen. However, futures and options suggest they expect the price to drop after the event, in what Glassnode analysts say could be a “sell the news” situation.

September call options “dwarf” put options, with traders making the case that the price of Ether could rise to $2,200 from its current level of $1,800, according to Deribit data compiled by Glassnode. There is even significant open interest up to $5,000. But in the month after the upgrade, there is little demand for calls and more demand for downside protection, suggesting traders are hedging or speculating on downside risk, Glassnode analysts said.

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“After the merger, the left tail is priced with significantly higher implied volatility, indicating that traders pay a premium for the protection of ‘sell-the-news’ put options after the merger” , Glassnode analysts wrote in a note.

Ethereum’s update has been long-awaited, and the news surrounding it has been welcomed by investors, who have seen the price of their token increase by roughly 80% over the past month. The blockchain is set up to facilitate the transition from the current system of using miners to a more energy efficient one with staked coins. The switch to this so-called proof-of-stake system is expected to happen shortly after being kicked out for several years. On Wednesday, Ethereum completed its last test before the update, and developers said the main event should take place next month.

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But while there’s a lot of excitement surrounding the merger, not everyone is convinced it will go smoothly. It is “very dangerous” not to consider the outcome of the update to be bad, according to Kevin Zhou of Galois Capital, a crypto hedge fund.

Zhou says he expects that after the merger, the old, so-called proof-of-work chain supported by powerful computers called miners, will continue to exist in a slightly modified and split form, with the outlet representing around 95 % of value and POW. taking approximately the remaining 5%.

“There’s a lot of head-in-the-sand behavior,” Zhou said. He suggested a few ways to play the event, such as going long Ether and short September and December quarters, among other strategies. The idea behind some of the strategies is to be able to grab more proof-of-work blockchain coins, which will be able to be traded.

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Ethereum’s blockchain upgrade has generated enough excitement in recent days that open interest in options for the token has reached $6.6 billion, surpassing Bitcoin’s $4.8 billion for the first time , according to Glassnode. Ether OI is close to setting an all-time high.

But there are many outstanding questions about what happens after the merger. While Ethereum adoption has increased, fees, which are critical to predicting stake performance and inflation rates, need to reverse course, based on previous cycles, for a new bull cycle to begin , according to Jamie Douglas Coutts of Bloomberg Intelligence. Macro inputs such as liquidity and yields have become the main determinants of cycle funds, as was the case in 2018, he said in a note.

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Many investors are likely to borrow Ether before the merger using other assets as collateral, in order to get more forked coins from the proof-of-work chain, said Marc Zeller, head of developer relations at Aave.

And as they seek to grab more EthereumPOW tokens, investors are expected to prepare software bots to track various DeFi applications on the EthereumPOW forked chain and exchange worthless assets such as off-chain stablecoins for EthereumPOW, he said .

“The moment the merger happens, there will be cutting-edge bots that will instantly find all the POW blocks to empty Uniswap and other liquidity pools into EthereumPOW,” he said. “The goal is to sell as many tokens as they can, to get as many EthPOWs, the only asset on the EthereumPOW chain that can have any kind of value.”

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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!