Ether derivatives trading is surging as large hedge funds speculate on merge

Ether-based derivatives are heating up as large traders increasingly speculate on the cryptocurrency's upcoming transition from proof-of-work to proof-of-stake.

Aggregate open interest of ether options across top-tier exchanges increased from $2.74 billion on July 2 to more than $7 billion on July 29. It currently stands at $5.9 billion. Open interest indicates the value of all outstanding contracts that have yet to settle.

Meanwhile, aggregate open interest of ether futures hit $7.58 billion on July 30, an increase from $4.71 billion on July 2. 

Joshua Lim, head of derivatives at Genesis Global Trading, told The Block that the surge in activity is tied to macro hedge funds positioning themselves ahead of the so-called ethereum "merge." This term refers to the network's transition from proof-of-work to proof-of-stake. 

Ether has seen its price pick up in anticipation of the merge, with the price of Ethereum's native token rising 59% over the last one-month period. The merge is expected to occur in September.  

"A more recent phenomenon has been the popularity of low-premium options structures in ETH from macro-discretionary hedge funds positioning for the merge," he wrote. "A common structure might be a call butterfly that pays off if ETH/USD finishes in December 2022 around $3000 spot price. These longer maturity, multi-leg structures are inflating the open interest in ETH options."

These strategies are more complex and require traders to trade more derivatives, which impacts volumes and open interest. A so-called call butterfly, for instance, involves two short call options and twice the number of the one long call option. 

"Ether options [open interest] market sense just because everyone is speculating on the merge," another institutional trader told The Block. 

Indeed, aggregate open interest across ether options is larger than aggregate open interest of bitcoin options markets, with open interest in the latter asset standing at $5.1 billion. 

The activity in ether's derivatives market is striking given the more sanguine bitcoin derivatives market, which has seen the ratio of spot trading volumes and futures volumes surge. That indicates activity in bitcoin trading has moved into trading of the underlying asset versus futures. 

The opposite phenomenon is happening in ether.