Bloomberg Línea — More cryptocurrency traders are building short ether (ETH) positions in the derivatives market as the underlying blockchain, Ethereum, is scheduled to undergo its biggest technical update this week, likely on Thursday (15), according to trading data.
Funding rates for bitcoin and ether perpetual futures contracts diverged sharply over the past weekend, according to cryptocurrency data firm Kaiko.
Ether’s funding rate has seen its sharpest drop since July 2021. Exchanges use the funding rate – or trading cost – to tie contracts to the underlying spot price. When the rate is positive, those who hold long positions are paying interest to investors who are short, and vice versa.
Cryptocurrency traders tend to favor perpetual contracts — which, unlike traditional futures, do not expire — in part because they allow them to hold highly leveraged positions. Ether was lower for the first time in six trading sessions on Monday, falling as much as 3.7% to $1,694.
The growing interest in ether is happening on the eve of The Merge – or The Merge – the highly anticipated upgrade of the Ethereum blockchain. The update will move the current Ethereum miner usage system to a more energy efficient one.
“With the merger happening this week, it could be that people are hedging themselves as the price of ETH has mostly increased while funding rates have turned negative,” said Andrew Tu, head of Growth at algorithmic cryptocurrency trading firm Efficient Frontier.
Many investors are hedging their long ether positions, according to Zaheer Ebtikar, portfolio manager at crypto hedge fund LedgerPrime. Short selling ether on the derivatives market is one way to hedge your risk.
Another reason to be long in ether on the spot market, Ebtikar said, is that these traders can receive “free money” derived from the efforts of some Ethereum miners to keep a different version of the blockchain running by miners.
Meanwhile, some traders also expect the merger – The Merge – to become a “buy on rumor, sell on fact” event for the market. Ether has quintupled in value over the past year and hit a record high of around $4,866 in November. It has dropped by about 50% this year.
“Investors in the perpetual futures market are largely in agreement that most of the positive fundamental catalysts for ether have already been priced in, with few additional upsides expected after the merger,” said Gabriel Selby, chief research analyst at cryptocurrency exchange CF Benchmarks, of owned by Kraken.
An extremely negative funding rate means that short traders are paying expensive fees to keep their positions open.
“The mindset of a trader is also very different from that of a long-term investor – in this case, they just think that for two to three days it is okay to pay if they think ETH will drop considerably,” explained Ebtikar. “If the bet is that there will be an ETH sell-off in sight, then it will be worth it.”
