Ethereum’s (ETH-USD) big upgrade to proof-of-stake, the “Merge,” is a big deal. But does the market see it that way? Or just as a flash in the pan? Here’s the latest intelligence from the New Digital World.
Traders Prepared to “Sell the News” When Ethereum Does Its Merge in September
Specifically: After September – assuming the big Merge to proof-of-stake happens on schedule – ETH could be headed for a significant “sell the news” moment.
As of Saturday, when Glassnode prepared this chart, open interest in ETH options had reached $6.6 billion. That’s a return to 2021 levels, and darn close to the all-time high. Not to mention, it’s much higher OI than Bitcoin (BTC-USD) options (for the first time ever)!
Importantly: “If we look at the September contracts on Deribit, the directional bias of Ethereum traders is immediately clear. Call options dwarf put options for size, with traders betting on ETH prices upwards of $2.2k, with significant open interest even out to $5.0k,” Glassnode analysts write.
“It sets up for a very interesting month ahead.” That’s an understatement, since it implies traders are betting on anywhere from 24% to 181% further upside for ETH in September!
However: October is not shaping up nearly the same way. For each monthly set of options contracts, Glassnode charts the “implied volatility smile.” This is where we can see if traders are placing super-bullish bets on higher prices – or playing it safe, betting on prices closer to current levels.
For ETH options in October, “we can see a dramatic decline on the right tail, with a relatively flat shape” compared to September, Glassnode notes. Plus, on the left tail, we see “significantly higher implied volatility, indicating traders are paying a premium for ‘sell-the-news’ put option protection post-Merge.”
So, that’s what we see in the options market… What about ETH itself? After all, if people are flooding into the crypto the way they are with the calls, it’s hard not to be optimistic! Well, Glassnode is picking up “relatively light spot demand” for ETH.
Below is the ETH trading action, going back to 2021. That way, we can see the broader context:
The blue line is ETH prices, which surged over +500% before the “crypto winter” took hold in November – way more than BTC prices (orange line). Today, we’re back to +144% since January 2021.
The green and red bars along the bottom show that, during the 2021 bull market, we often saw 500,000 ETH traded per day (or more). Yet here in 2022, we’ve only seen that level of trading volume twice:
On June 13 – when Terra’s collapse took down Celsius Network (CEL-USD), etc. – 840,000 ETH traded on the downside.
The other time was June 15, when 564,000 ETH traded on the upside as the crash stalled out. ETH prices then consolidated for a good month until ultimately breaking out after July 14… When developers set a September 19 goal for the Merge.
Since then, ETH trading volumes have been more like 150,000 per day. If people were excited to buy/own ETH – versus simply speculate on a single event – wouldn’t you expect much more volume on the upside now?
Bottom line: It may take investors more time to see how big of a deal the Merge will be beyond September. But our next story throws that into clear focus.
Researchers Expose Miners Cheating the Ethereum Protocol
On Friday, we got a new report on ETH mining from the Hebrew University of Jerusalem, the top-ranked university in Israel (and which Albert Einstein helped found!)
The report, “Uncle Maker,” has a quirky title – and shines a very serious light on unethical miners gaming the system.
Researchers accuse a large, longtime group of miners, F2Pool, of “manipulating block timestamps” on Ethereum “to obtain consistently higher mining rewards compared to the honest protocol.”
How it works: “The attack allows an attacker to replace competitors’ main-chain blocks after the fact with a block of its own, thus causing the replaced block’s miner to lose all transactions fees for the transactions contained within the block, which will be demoted from the main-chain,” explain the Hebrew University researchers.
First, they had to verify that a “consensus-level attack” is even possible on Ethereum. Well, after designing algorithms that prove it, in theory… Researchers say they found evidence of F2Pool actually doing it!
Then, their report explains how it got its name: The victim’s block, “although ‘kicked-out’ of the main-chain, will still be eligible to be referred to by other main-chain blocks, thus becoming what is commonly called in Ethereum an uncle.”
The Hebrew University researchers kindly “suggest concrete fixes for Ethereum’s protocol and implemented them as a patch which can be adopted quickly and mitigate the attack and its variants.”
Still, it doesn’t reflect too kindly on F2Pool – which researchers told CryptoSlate “earned 14% more from block rewards” than they should have, plus “all the transaction fees contained within” the affected blocks…
Plus, it suggests the proof-of-work setup in the “Old Ethereum” is already a bit of a Wild West… Even before the Ethereum ecosystem largely shifts over to the new proof-of-stake chain in development.
Justin Sun of TRON (TRX-USD) is encouraging people to stay and keep mining on the Old Ethereum, which seems to be getting a separate nickname of ETHW:
— H.E. Justin Sun🌞🇬🇩 (@justinsuntron) August 4, 2022
But as I wrote on Thursday: Other prominent voices in crypto are warning that sticking around is dangerous – increasingly so as DeFi, stablecoins, and probably NFTs leave…creating a security risk.
Chainlink (LINK-USD) is the latest, Monday morning, to say it’ll follow the Ethereum Foundation’s lead as it “upgrade[s] the Ethereum blockchain to PoS consensus.” Chainlink will not support any “PoW forks” even if activity does continue on the Old Ethereum, as it has on Ethereum Classic (ETC-USD).
Quote of the Day
“We believe the fundamental catalysts are aligning in a way that will help BTC break out of that downtrend and snap into a new uptrend.”
– Luke Lango & Charlie Shrem, Crypto Investor Network
What are those catalysts? “All of those bullish on-chain metrics we’ve shown you over the past few weeks have held their critical support levels. The contagion from the Terra collapse has stopped spreading,” Luke and Charlie write in Saturday’s update to their Crypto Investor Network.
“Technically speaking, we see a gradual appreciation in BTC prices to $30,000 by the end of the year, followed by a melt-up to $40,000 in early 2023 to kickstart a new boom cycle.”
Again, we’re talking “end of the year, early 2023.” Today, Luke and Charlie advise to “remain patient and wait for confirmation of a breakout above the $25,000 level.”
Even so, a handful of cryptos have emerged as Strong Buys. Get the short-list of elite cryptos when you check out the Crypto Investor Network. The latest opportunity they highlight there is simple and elegant: Grab on to a major catalyst on the horizon – then ride it higher as the rest of the world catches on. Charlie’s free briefing on the strategy is available here.
On the date of publication, Ashley Cassell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. To have more news from The New Digital World sent to your inbox, click here to sign up for the newsletter.
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