Is it foolish to expect a massive Ethereum price surge pre- and post-Merge?

Even the most bullish investors are surprised by Ether’s (ETH), impressive 85% gain over the past 30 trading days. It makes the $800 range in mid-July seem a long time ago. Bulls are now aiming to reach $1,900 support. However, derivatives metrics tell a different story and data suggests that professional traders remain skeptical.

Ether 1-day Price Index, USD. Source: TradingView

Remember that Bitcoin (BTC), the most popular cryptocurrency, gained 28% during the same time period. It is clear that Ether’s bull run was driven primarily by the Merge expectation. This is a transition to a Proof-of-Stake (PoS), consensus network.

Goerli was last Ethereum testnet to implement the Merge. It officially became a proof of stake blockchain on August 11th at 1:45 UTC. The final hurdle was cleared without major setbacks. This gave the green light to transition to the mainnet on Sept. 15/16.

Investors’ high expectations for this landmark transition are justified. This multiphased upgrade will result in higher scalability, lower fees and a parallel processing mechanism called sharding. The Merge does not change the mining mechanism, which is a burdensome and costly process.

The Merge will reduce the equivalent inflation by removing the need for miners to compensate with newly minted coins. The Merge doesn’t address the processing limit or how much data can be validated before being inserted into each block.

Analyzing derivatives data can help investors understand how confident they are that Ether will sustain the rally and move toward $2,000 or more.

Since Aug. 1, Ether’s futures premium is negative

Because of the price differential from spot markets, retail traders tend to avoid quarterly futures. They are still preferred by professional traders because they avoid the constant fluctuation in contracts’ funding rates.

Fixed-month contracts trade at a premium to spot markets, as investors are willing to withhold more money. This is not a unique situation for crypto markets. Futures should be traded at a 4%-8% annualized premium in healthy markets.

Annualized premium for Ether 3-month futures. Source: Laevitas

On Aug. 1, the Ether futures premium fell to the negative zone, indicating a high demand for bearish bets. This is known as “backwardation” and it is usually alarming.

Roshun Patel (ex-Vice President at Genesis Trading), posted that Ether futures are in backwardation because of Ethereum “fork odds.” This suggests that traders are taking bearish positions on futures contracts to offset their upside risks.

Ether options market traders need to be able to exclude externalities that are not specific to futures instruments. The 25% delta skew, which is a sign that arbitrage desks and market makers are charging too much for protection against upside or downside risk, can be seen as an example.

Options investors are more likely to be able to pump the market in bullish markets. This causes the skew indicator below -12%. A market’s generalized panic causes a positive skew of 12% or more.

Ether 30-day options 25% delta-skew: Source: Laevitas

The delta skew for the 30-day period was at -4% on July 18th, its lowest point since October 2021. These numbers are not optimistic. They show traders’ inability to accept downside risks when using ETH options. Professional investors are not encouraged by the recent rally of 85%.

Traders anticipate full-blown volatility in the future

According to derivatives metrics, pro traders don’t believe ETH will surpass the $1,900 resistance soon. This thesis is supported by expectations for volatile movements at the Merge date and other indicators. Mohit Sorout says:

This is the most famous crypto play of this year. > Spot $eth buyers > Hedging it with selling Dec futures Expect full blown fuvkery around the merge
Mohit Sorout (@singhsoro), August 9, 2022

One thing is certain: Investors will expect “free” coins after the proof-of-work fork. It remains to be seen if Ether will lose most of its 85% gains over the past 30 trading days in the rush to unwind futures trades.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.

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