Investors flocked


is trading as a critical upgrade to one of crypto’s most crucial networks looms this month, setting the stage for volatility in the days and weeks ahead.

Scheduled to begin on Tuesday and complete by September 20, “The Merge” is a long-awaited and highly anticipated sea change for the Ethereum blockchain network. Ether, the second largest cryptocurrency after


– is the native token of Ethereum.

The merger is set to fundamentally change how Ethereum works by ditching the “proof-of-work” system that underpins Bitcoin’s security and operations in favor of a “proof-of-stake” system. This move will make Ether mining redundant, reduce the carbon footprint of the network, and reduce the supply of circulating tokens.

Both of these changes should drive prices up. Most crypto traders bet on it.

From June to August, Ether outperformed almost all leading digital assets by “a long shot”, a sign of intense interest in the preparations for the merger, according to Clara Medalie, director of research at the crypto-data firm. Kaiko. While gains have dissipated since an August selloff gripped the stock and crypto markets – the two are correlated given their sensitivity to changes in investors’ willingness to take risk – Ether has still gained more 50% since mid-July.

Bitcoin was left in the dust. By almost any measure, investor attention now firmly favors its smaller counterpart.

None of the Bitcoin products covered in data firm CryptoCompare’s latest monthly digital asset management report made gains in assets under management or volume in August. Instead, Ethereum-based products dominated the growth. And for the first time since December, the

Grayscale Bitcoin Trust

lost its position as the most traded cryptographic trust product; first place goes to

Ethereum trust in grayscale

This shift in investor interest – and fund flows, with the average weekly inflow for Ether products at an all-time high in August – is starting to become evident in key metrics of market sentiment and asset performance. .

The Ether-to-Bitcoin ratio, which measures the performance of the Ethereum token against the largest digital asset, rose at the fastest pace on record from June to July, according to Medalie. Additionally, the 30-day volatility spread for Bitcoin and Ether widened to its highest level in over a year, suggesting a sharp difference in market activity between the two assets, reflected by booming trading volumes, Medalie said.

“Derivatives markets have also played a pivotal role in Ether market activity,” Medalie says. “Ether-denominated perpetual futures open interest recently broke all-time highs, suggesting traders are placing their bets ahead of the merger.” Open interest refers to the total amount of open derivative contracts.

A supermajority of all digital asset trading takes place in the crypto derivatives market, where perpetual futures or “perps” reign supreme and play a key role in both broader market price discovery and in the cover. Additionally, leverage – borrowed money – is widely available to derivatives traders.

So, as more and more money flows into the Ether derivatives market, it is likely to exacerbate price swings as traders change their bets and take new positions in the coming days. as the merger’s success and popularity become clearer.

“The number of futures positions [denominated in Ether] open at this time represents a staggering all-time high, acting as massive leverage on Ether’s price action over the next several weeks,” Conor Ryder, an analyst with Medalie’s Kaiko team, said in a note. .

And it’s not just day traders or crypto fanatics taking part. Ether’s greatest holders, the so-called whales, are also getting in on the action. Top whale addresses have moved a significant amount of Ether to exchanges, according to analysts at crypto exchange Bitfinex, with holdings at non-exchange addresses down 11% in the past three months. Moving crypto from a private wallet to an exchange is a key precursor to trading.

So where is the sentiment now, less than a week before the merger begins?

Perhaps the best indicator is in the Ether options market, according to Kaiko’s analysis, which currently shows what may be “the clearest case of risk hedging the crypto options markets have seen.”

The pre-merger expiring Ether options market is almost evenly split between calls – bets that prices will go up – and puts, which are bets that prices will go down. But that all changes for options that expire after the merger, with 79% of all options expiring after the network upgrade being calls. This is a bullish sign.

“Investors seem optimistic about Ethereum’s long-term future, as evidenced by options markets, but in the short term they remain concerned about the possibility of a self-inflicted crisis,” noted Ryder of Kaiko, citing an accumulation of short Ether positions. futures contracts, which, like put options, likely indicate that traders are hedging their bets.

“The merger is one of the only recent crypto events that wasn’t macro-driven,” Ryder said. “It will be interesting to see if this triggers a breakout to lower correlation with the stock market, for better or for worse.”

Write to Jack Denton at [email protected]