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It’s no surprise that as the Ethereum 2.0 “merge” gets ever closer to becoming a reality, traders focused on the ETH derivatives market are settling in to “buy the rumor and sell the news.” No surprise there.
According to a new report based in part on blockchain Glassnode intelligence, “backwardation” is now happening to both ETH futures and options as September nears and which is when the long-awaited merge is scheduled to occur. Backwardation occurs when the prices in the futures market fall below the spot price.
Says Glassnode, if you look at the crypto derivatives exchange contracts on Deribit, the bias of ETH traders becomes very clear. The call options are huge when compared with put options. Traders are setting their sights on an ETH price that will exceed $2.2K with an open interest that even extends to $5K, although some investors believe the latter is a bridge too far for the merge.
Call options are considered a temporary guarantee that a trade will purchase an asset at a price that's predetermined. Right now, demand to buy calls are said to be at a premium. This is extremely bullish for ETH’s price as the September merge nears.
An October ETH Reversal
But this is crypto, which means volatility rules the day. That said, the bullish trend is already seeing an October reversal where demand for ETH options dwindle significantly. ETH’s apparent volatility, which is the system of measurement that gauges the digital assets' future price, is said to be more on the downside than early September's upside.
What this all boils down to is that ETH traders are “paying a premium for ‘sell-the-news’ put option protection post-merge," or so states Glassnode.
ETH Open Interest
As of this writing, ETH open interest is calculated at around $6.6 billion, which, for the first time ever, is higher than the number one crypto asset, Bitcoin (BTC), which presently comes in at $4.8 billion.
Financial experts state that presently, BTC derivatives are showing very little directional bias, which for traders means the daddy of all digital assets is boring. However, for everyday investors who don’t trade but instead hold (or hold onto their assets for long durations), boring represents a great opportunity to DCA or dollar cost average into the asset.
September 19th Merge
ETH's price spiked after its developers formally announced that the ETH merge would finally occur on September 19. For those still in the dark about “the merge,” it’s the new protocol that will combine the present proof-of-work ETH mainnet with the proof-of-stake beacon chain. In the end, ETH will become a proof-of-stake asset.
Known as Ethereum 2.0, developers believe that the upgrade will make the current congestion-prone digital asset, which also bears very expensive transaction fees, more scalable and far faster.
The merge will also theoretically end the ETH mining process. It will require participants to pledge or stake in the existing ETH network to create new Ethereum. The coins will, in turn, be issued as “staking rewards.”
Deflationary Impact
When the merge happens, ETH will automatically enter into a state of deflation. This is said to reduce, on a significant level, the rate at which new ETH can be created and disbursed to investors.
If demand remains relatively high for the number two digital asset, the future price predictions are estimated to be $5,000 per ETH by spring of 2023 or so, claims the co-founder of BitMEX, Arthur Hayes. For the average retail investor, DCAing into ETH in both the short and long term might be a prudent move.
“Great for Decentralization”
At a recent crypto conference that occurred in France, ETHs co-founder, Vitalik Buterin, stated that presently, ETH can handle anywhere from 15-20 transactions per second. This includes rollups and sharding. But after the merge, ETH will potentially process 100,000 transactions per second, making it far faster and giving it more utility.
The robot-like Buterin also states that the merge will execute “Verkle trees” which are said to be a kind of mathematical proof along with “stateless clients.” In other words, the new technical upgrades should allow investors to become their own network validators without the burden of having to store massive amounts of data in their computers.
Proof-of-stake networks allow validators with staked or locked-up ETH to verify and confirm their personal transactions without having to go through a middleman like a centralized exchange or a traditional bank.
Says Buterin, the merge will therefore be “great for decentralization.”
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.