Ethereum derivatives trading has grown by around 10% in the past month ahead of The Merge, accounting for up to 57% of combined Bitcoin and ETH futures trading volume.
In just 24 hours, over $35 billion worth of ETH futures were traded, compared to $32 billion worth of Bitcoin futures. Additionally, open interest, or the number of unsettled Ethereum contracts, nearly doubled to $8.43 billion this week.
For the month of September 2022 to date, according to data from Coinglass, the total volume of derivatives traded for Ethereum is around $87 billion, compared to around $67 billion for Bitcoin.
Forward contracts, or futures, are agreements to buy or sell an asset at a predetermined price in the future. In the case of Ethereum futures, ETH is the asset in question.
Contracts can be settled either by physical remittance or cash transfer. For example, when a futures contract expires, the buyer can receive physical ETH from the seller, or they can accept cash, which settles the contract.
An opportunity to buy futures contracts?
According to an analyst from Kaiko, a provider of crypto trading data, most traders are setting their strategies in view of the impending network meltdown. Investors are taking short positions, suggested by funding rate data, anticipating potential issues with The Merge, while taking long positions in ETH to neutralize downside risk in the price.
Funding rates are payments made by traders based on the price difference between a futures contract and the spot price of its relevant asset. A negative funding rate indicates that traders expect the market to deteriorate, but also represents a buying opportunity for futures contracts.
Some traders are also gearing up for an aiddrop of new tokens from a proof-of-work fork of Ethereum, which some developers are reportedly working on.
If the merger is successful, it will result in a slower issuance pattern for ETH, reducing the number of tokens in circulation and ultimately driving the price higher. This deflationary action could reduce the volume of investors holding short positions as the price rises, lowering the current motivation for futures trading.
Despite Bitcoin’s bearish outlook, positive signs have emerged in the market
Although the future of BTC is not tied to any software updates, the prolonged bear market could lead to higher short positions in the short term.
However, institutional interest in Bitcoin has grown even amid the bear market. BlackRock, the world’s largest asset manager with over $1 trillion in assets under management, recently launched a private BTC trust for its institutional clients. An industry CEO believes this is a sign of the maturity of cryptocurrency as an asset class.
Similarly, the Chicago Mercantile Exchange recently launched Bitcoin and ETH futures products denominated in euros.
VanEck, on the other hand, filed an application in July to launch a spot bitcoin Exchange Traded Fund (ETF), which the U.S. Securities and Exchange Commission deferred.
Finally, Grayscale, which runs an Ethereum fund, recently filed a lawsuit against the SEC for rejecting the conversion of its bitcoin fund into a cash ETF.
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