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Ether's Strong Performance Amidst Crypto Market Slide: Analysts Divided

Aug 21, 2023 at 01:49 pm

The past week witnessed a remarkable shift in the ether-bitcoin ratio, surging by more than 2%. This sudden gain contradicts its historical pattern of experiencing losses during periods of risk aversion.

1. Amidst a broader market decline, the ether-bitcoin (ETH/BTC) ratio displayed an unexpected rise in the preceding week.

2. According to some analysts, the extraordinary outperformance of ether can be attributed to the optimism generated by the potential launch of futures-based Exchange-Traded Funds (ETFs).

3. Contrarily, alternative viewpoints emerged, highlighting the diminished interest in altcoins and the strategic hedging practices adopted by market makers.

The recent market upheaval exposed a contrasting trend where Ether (ETH), the native token of the Ethereum blockchain, incurred lesser losses compared to the leading industry player, Bitcoin (BTC). Analysts are grappling with divergent perspectives to unravel the reasons behind this deviation, given that Bitcoin typically maintains its status as the favored asset during market downturns.

While Bitcoin's value plummeted by 10.5% in the preceding week, Ether experienced a relatively milder decline of 8.3%. This resulted in an unexpected surge of over 2% in the widely monitored ether-bitcoin (ETH) ratio, a phenomenon substantiated by Bitsday data. The total market capitalization of the cryptocurrency space also witnessed a decline of 8.3%, settling at a value of $1.02 trillion.

The deviation from conventional norms piques curiosity, as historical trends indicate that investors tend to gravitate towards Bitcoin, the largest and most liquid cryptocurrency, when market volatility intensifies. Over time, this ratio has typically decreased during market downturns and increased during upward market movements.

At present, a sense of optimism surrounds the imminent launch of ether futures-based exchange-traded funds (ETFs) in the United States. This optimism is believed to have played a pivotal role in the exceptional performance of Ethereum's cryptocurrency, as indicated by Noelle Acheson, the author of the Crypto Is Macro Now newsletter.

ETH futures ETF

"The ETH market seems to be rousing from its slumber and acknowledging the potential introduction of an ETH futures Exchange-Traded Fund (ETF) by October. While this product may not be as optimal as a spot ETF, it still offers a convenient avenue for both retail and institutional investors to broaden their exposure to cryptocurrencies. This is likely to stimulate fresh capital inflows into the asset," elucidated Acheson, underscoring the driving force behind the exceptional performance of ether.

Futures-based ETFs emerge as financial instruments that issue tradable securities, tracking the price movements of an asset's futures contracts. An Ethereum-based version of this concept would endeavor to emulate the cryptocurrency's performance, akin to how ProShares' Bitcoin Strategy ETF functions for the prominent cryptocurrency. Since its inception in October 2021, ProShares' BTC futures-based ETF has meticulously mirrored the spot price, drawing over $2 billion in investments from individuals. While it's considered somewhat inferior to a spot-based ETF due to the associated roll costs, it presents a viable option for those aiming to gain cryptocurrency exposure without direct ownership.

At the present juncture, a minimum of 16 applications for ether futures ETFs or ether-bitcoin futures ETFs are pending regulatory approval in the United States, as reported by the Wall Street Journal.

"As knowledge about the imminent listings disseminates, we should anticipate a surge in interest," Acheson conveyed to Bitsday, further suggesting that heightened investment activity could propel Ethereum's on-chain operations, contributing to the increase in daily ETH burn. "This could potentially create an added tailwind for the price, thereby amplifying the volume of on-chain transactions, engendering greater transaction fees, a higher frequency of ETH burns, supply reduction, and so forth."

Lack of interest in altcoins

Meanwhile, Markus Thielen, the head of research and strategy at Matrixport, a provider of cryptocurrency services, has highlighted that the substantial decline in bitcoin's value primarily emanates from waning interest in ether and other cryptocurrencies.

"As the cryptocurrency market has entered a phase of reduced liquidity, marked by the withdrawal of several market makers from the crypto arena and the elimination of zero-fee trading on exchanges, prominent participants have shifted their attention towards bitcoin, opting to engage with it rather than the less liquid alternative cryptocurrencies. This shift in focus is a core reason why bitcoin's performance lagged behind during the market tumult of the previous week."

The concept of liquidity, denoting the capacity of a market to absorb substantial orders at stable prices, has undergone significant degradation following the downfall of Sam Bankman Fried's FTX exchange in November of the previous year. The situation has further deteriorated due to the U.S. Securities and Exchange Commission's classification of various altcoins as securities in its legal actions against major platforms such as Binance and Coinbase. According to data from Paris-based Kaiko, the liquidity of altcoins on U.S.-based exchanges has contracted from $32 million to around $20 million since November.

This liquidity decline is accompanied by a phenomenon known as high slippage – the variance between the price at which a trade order is executed and the price at which it was initially requested. Consequently, prominent traders may have opted to steer clear of alternative cryptocurrencies this year, given the increased risk associated with trading such assets in the current environment.

Market makers arrested ETH's drop

Conclusively, Griffin Ardern, a volatility trader at Blofin, a firm specializing in crypto asset management, has highlighted the significant impact of hedging strategies employed by market makers dealing with ETH options, as a primary driver behind ether's impressive performance.

"In the case of BTC, the hedging tactics adopted by market makers played a role in the decline in its price. However, when it comes to ETH, it was a pivotal element that prevented a sharp price drop," Ardern explained. "ETH exhibited a robust positive gamma in proximity to the strike price, roughly around $1,600. Furthermore, its overall gamma value remains in the positive range, indicating that in times of price decrease, market makers shift from being sellers to becoming buyers."

Market makers function as entities responsible for generating liquidity within the order book. Their role involves executing trades counter to the prevailing market trend when gamma, a measure of options' sensitivity to price changes, maintains a positive value. This approach effectively curbs the intensity of price fluctuations, thus contributing to the stabilization of the market.

By skillfully utilizing hedging strategies and capitalizing on positive gamma, market makers contribute not only to maintaining market stability but also to ether's remarkable performance, shielding it from drastic price plunges.

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