The big boys gamble on Ethereum ahead of The Merge

Last Updated: 1 August 2022

In July, open interest in Ethereum more than doubled. Not only consumers, but also hedge funds have taken positions in the run-up to The Merge.

Ethereum rises by more than 60%

The Merge is the merger of Ethereum’s two current blockchains and is expected to take place on 19 September. Traders are eagerly awaiting this event, and this is also reflected in the ETH price.

A month ago, the Ethereum price was 1000 euros, but it is more than 1650 euros currently.

If you have a good feeling about The Merge and you want to profit from it financially, you can just buy ether. Keep this and hopefully sell it at a higher value.

Gambling on Ethereum with long and short positions

Another possibility is to gamble with a leverage construction. If you use leverage to bet on a higher Ethereum price in the future, then this is called a long position. If you bet on a lower price, then this is called a short position. You then conclude a contract with the stock exchange that offers these kinds of positions. If you add all these contracts together, you get the open interest.

A lot of new money on the market for Ethereum options

The total open interest of ether options at the major exchanges rose from $2.74 billion on July 2 to more than $7 billion on July 29. At the time of writing, there is $5.9 billion worth of open interest.

What does this mean? If open interest increases, then it represents new or additional money coming into the market, while a decrease indicates money flowing out of the market.

Not a prediction of Ethereum

A common misconception of open interest lies in its alleged predictive ability. The number of open contracts does not predict the price. High or low open interest only reflects the interest of investors, but this does not mean that their views are correct or that their positions will be profitable.

Quiet period for Ethereum network

Joshua Lim, head of derivatives at Genesis Global Trading, says the increase in open interest is because macro hedge funds, in particular, want to take a position before The Merge takes place. The crypto world has been waiting for this event for years, and perhaps it is a good thing that it takes place during a bear market.

During the bull market, the number of transactions on the Ethereum network spiked so much that transaction fees became practically prohibitive for normal users. They don’t say for nothing that the bear market is for building, and the bull market is for reaping the rewards of your work.

Hedge funds use butterflies

Lim says hedge funds have a long shot at benefiting from The Merge.

“A more recent phenomenon is the popularity of low-premium option structures in ETH from macro-discretionary hedge funds positioning themselves for The Merge. One common structure may be a call butterfly that pays off when ETH/USD is worth around $3,000 in the spot market in December 2022. These longer duration, multi-leg structures increase open interest in ETH options.”

These strategies are more complex and require traders to trade more derivatives, which impacts volumes and open interest. According to Investopedia, a butterfly strategy is one that combines bull and bear spreads with a fixed risk and capped profits.

This is a neutral strategy and pays off most, if the underlying asset does not change before the option expires. It can be a case of four short and four long positions or a combination of longs and shorts at three different prices.

Invest only what you can afford to lose

A warning from us: playing with options carries risks. This also applies to ‘just’ buying ether to speculate on The Merge. There is no certainty that the price will rise, so only invest money that you can afford to lose.

  • Steven Gray

    Steven Gray is an experienced cryptocurrency and blockchain journalist with over 7 years of reporting on the crypto industry across major publications. His proficiency in technical analysis provides him the skills to evaluate complex trading algorithms and AI systems. Steven leverages his extensive network of academics and finance professionals to incorporate expert opinions into his unbiased analyses.

    Known for his engaging yet objective writing style, Steven keeps readers informed without hype. His rare blend of crypto domain knowledge, trading acumen, impartiality, and communication skills makes him an ideal author for in-depth reviews of innovations across the cryptocurrency and financial technology sectors.

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