Ethereum
The strategic pivot to Ethereum amid market dynamics
“IBIT is the fastest growing ETF in ETF history,” Larry Fink, CEO of Blackrock (BLK), said recently. declared in an interview with Fox Business. The SEC’s approval of spot Bitcoin ETFs in January and subsequent performance have propelled BTC and the broader crypto market to new heights.
First, Bitcoin itself hit a new “all-time high” as prices surpassed $70,000. US-based CME Bitcoin futures have surpassed the open interest of all other exchanges, including Binance, to become the largest BTC derivatives platform. Finally, the basis of futures contracts has reached more than 25% annualized, or almost five times the American risk-free rates.
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Where does this leave us today?
Bitcoin has another major fundamental milestone that keeps traders and investors excited about higher prices, and that is the Bitcoin halving. Scheduled around April 20 (the perfect meme, of course), the Bitcoin block issuance rate will increase from 6.25 coins per block to 3.125.
Although this is a small sample size, over the past few years that Bitcoin has seen a halving, performance from January to December averaged around 200%. This would imply a year-end price for BTC of around $91,500.
That said, from a derivatives trading perspective, the predictability and certainty around halving does not resemble the uncertainty of an SEC spot ETF decision and subsequent adoption of ‘AND F. This means that traders are unlikely to be surprised by a fully known event. Given this understanding, the use of Bitcoin derivatives as opposed to Ethereum tells us a story about the potential opportunity for a post-halving rotation.
Looking at the April 26 option expiration (top) versus June 28 (bottom), we can clearly see the dynamics factored into the Bitcoin and Ethereum options. First, for April 26, Bitcoin options on the buy wing are priced higher than the Ethereum call wing, while the Ethereum sell wing is priced higher than the Ethereum put wing. BTC sales wing.
The longer-term options for June 28 are overlaid almost the same, showing that a close relationship between BTC and ETH will be steady in the long term.
What this tells me is that the current halving narrative is baked into short-term BTC options, while at the same time the lack of optimism around Ethereum due to a potential designation of “securities” of the SEC and the likely disapproval of a spot ETF in May are prompting traders to offer put options on Ethereum.
Another thing I would like to point out is the difference in CME-led positioning between BTC and ETH.
Looking at the top chart of BTC derivatives positioning, we can see that CME futures (in green) really started in earnest in October around enthusiasm for the approval of a spot ETF. Today, CME BTC open interest dwarfs any other exchange, including Binance.
If we look at Ethereum CME open interest, we see virtually no increase while Binance continues to significantly exceed CME open interest. This tells me that the US market has not yet started building positions in Ethereum; and if we are heading towards a spot ETF for Ethereum, whether in May or much later (after the first rejections), buyers have not yet invaded Ethereum.
So why should we even care about this opportunity to buy laggard Ethereum?
While the market is excited about the BTC halving slowing the rate of coin issuance in circulation (clearly displayed through the 4/26 options), the supply of ETH has not only already stopped growing, but since September 2022 it has been actively decreasing, due to the EIP. -1559 burns.
Ethereum has also just successfully completed the Dencun upgradeas L2 and L3 begin to facilitate the growth of RWA, DeFi and NFT, as well as the ability to create native “app chains” for high-speed protocols that want to isolate activity within their own environment.
No one knows for sure what the future holds, and investing is fraught with risk. But a general axiom that I like is whether the fundamentals are already priced in or is the market underinvested in a potential opportunity?
In my mind, after halving, the BTC events will be behind us, and instead of just “selling the news”, we can “turn to the alts” in this case, specifically Ethereum.