ETH Merge - Risk on Market, the Role of Derivatives and ETH PoW

2022년 9월 23일

Despite the successful ETH merge, the positioning of traders has been fairly one-way since then. Since September 15, ETH has underperformed BTC by 12.43%. This rally to the downside can’t only be attributed to the adverse macro conditions. The Merge is and has been an unequivocally bullish and risky event for Ethereum. If the merge had failed, it would have been catastrophic for the ETH price and the crypto ecosystem in general.

Normally, a headline like the Merge would have driven the Market completely risk-on, however, risk was already on. On August 23 ETH/BTC was trading at 0.075 and topped 0.0856 (+14%) on September 7. At the merge snapshot, ETH/BTC was trading at 0.08099 (+7.9%). At the time of writing, its trading at 0.0688 (-12.43%).

Interestingly enough, Delta-one traders were trying to get the most out of this event and in this case, they bet on the ETH Proof of Work coin airdrop, in the case that there was a Hard Fork of the Ethereum Blockchain.

Derivatives traders entered long positions on spot ETH, and hedged the market exposure via Futures. In normal market conditions, the Basis spread and the funding spread between ETH and BTC tends to zero.
While a positive (negative) spread is typically a signal of bullish (bearish) market.
As the possibility of having an ETH PoW token materialized, the funding spread between the two pairs became wider and wider, and reached -394.2% annualized in the hour prior the merge.
Hedging 1 ETH via a Perpetual Future on FTX for the 24h prior the merge costed $12.18 (or 0.7585% ETH). In the 4 hours following the creation of the ETH PoW market on FTX, the coin was trading at an average of $22.98, that is 88.73% profit excluding fees.

FTX was one of the first exchanges to both credit the airdrop and to support trading of ETH PoW. All the market participants who had their Ethereum outside FTX did not receive the token at that time, nor had the possibility to sell it on margin and cover the position at a later date. Indeed, since the airdrop, ETH PoW flow has been skewed to the sell side and it is now trading at $6.167.

Now I expect that Basis and Funding spread will find a new equilibrium that will be close to the ETH PoS staking rewards, thus a minus 4-7% annualized spread between the two pairs is reasonable.
For ETH PoW I don’t see a long future as most of the Developers, Protocols and Community are not supporting it anymore.

Happy Trading!
Matteo Bottacini and the Crypto Finance Trading Desk