Chaos Market After Ethereum Merger

Chaos Market After Ethereum Merger

Trend this week

The price of ETHW (a fork of Ethereum) plummeted as selling pressure mounted and miners left.

Chaos Market After Ethereum Merger

Ethereum’s Proof-of-Work had a rough start. ETHW, the token representing the new hard fork of the Ethereum network, has fallen more than 80% since its listing on FTX. The network’s generally poor launch situation was exacerbated by the glitch and the emergence of a competing fork called EthereumFair, which is backed by exchange Poloniex.

Meanwhile, one of the first to hard fork the ethereum network saw a surge in hash rate as miners transitioned to ETC mining following a successful merger. Ethereum Classic forked in 2016 but failed to gain significant market share or usage over the years. ETC is down 25% this week and has very poor liquidity on centralized exchanges, which could create problems for new miners looking to cash out.

Chaos Market After Ethereum Merger

If miners were to sell their ETC on the spot market, they would see a nearly 5x drop in a market sell order of $100,000 than when selling ETH. This extra cost is the next in a series of problems for ETH miners going forward as they struggle to stay relevant and, most importantly, profitable.

1. Price changes

Post-merger sell-off sweeps markets

Chaos Market After Ethereum Merger

In what many had expected to be a positive week for ether prices, a successful merger ended a week of sharp sell-offs of roughly 25%. ETHW and ETC were also among the worst performers this week, suggesting that established ethereum miners will struggle to stay profitable. In broader industry news, a South Korean court issued an arrest warrant for Terra founder Do Kwon, the Blockchain Association formed an industry PAC, Wall Street firms Charles Schwab, Citadel Securities and Fidelity Digital Assets) announced the launch of a new cryptocurrency exchange, EDX Markets.

ETH discount rate narrows to lowest level since May

Chaos Market After Ethereum Merger

Discounts for staked ETH tokens relative to spot ETH have narrowed to their lowest levels since May, a trend that first emerged hours after the ethereum network successfully transitioned to proof-of-stake. Liquid staking derivatives such as Coinbase’s cbETH, Binance’s bETH, and Lido’s stETH are wrapper versions of ETH staked on the Ethereum consensus layer (Beacon chain). They are not pegged to ETH, and their market price takes into account some regulatory and smart contract risks. For example, if a validator is involved in being “punished” by the Ethereum network in the event of a non-good problem with the validator, those tokens involved in punishing some of the Ethereum staking nodes may be at risk.

Lido’s stETH discount has narrowed sharply from 4% to just 1%, thanks to increased liquidity in Curve’s stETH pool, the largest secondary market for staking ether. The cbETH and bETH markets also saw strong buying pressure immediately after the merger (we discuss the post-merger market reaction here). While this trend suggests that some of the risk premium has been removed, the staking ETH discount is likely to persist until the next Ethereum upgrade next year allows staking withdrawals. However, the opportunity cost of holding ETH has now increased (because staking provides additional benefits), which may provide some tailwinds for getting a stake in the ETH market.

2. Market liquidity

The US dollar remains the dominant fiat currency among cryptocurrencies

Chaos Market After Ethereum Merger

While the majority of cryptocurrency transactions are currently conducted using stablecoins, fiat currency remains a key channel to enter and exit the market. The U.S. dollar has historically been the most important fiat currency among cryptocurrencies, but how has its role changed over time? The share of Bitcoin traded against the U.S. dollar has increased significantly since 2018, with the U.S. dollar currently overtaking Bitcoin 70% of coin trading volume.

This trend can be explained by the increasing institutionalization of the market, as large investors generally prefer to trade in dollars. However, a closer look at the breakdown by fiat currency reveals that local regulation may also have played a role. Notably, Bitcoin trading volumes in the Japanese market have dropped significantly, with Japanese exchange Liquid’s annual volume falling by 5% between 2018 and 2021 following a $97 million hack and tighter regulation in Japan times. In contrast, Bitcoin trading volume in the U.S. dollar market rose 30 percent over the same period.

The market share of stablecoins is likely to continue to grow as regulatory regimes around the world become clearer. For example, Japan is reported to be considering loosening scrutiny rules for new assets. For now, the U.S. dollar is still the hegemon.

ETH market share hits record high during post-merger sell-off

Chaos Market After Ethereum Merger

The market share of ethereum trading volume reached an all-time high in last week’s post-consolidated sell-off, approaching 70% of bitcoin’s volume. The fall in spot prices was exacerbated by the massive unwinding of leveraged long positions in the derivatives market, leading to a surge in spot volumes. Overall, ETH’s market share has more than tripled since 2020, indicating that the market structure is shifting from BTC to another.

Liquidity in the ETH spot market evaporated as trading volumes surged, as measured by bid and ask volume within 2% of the midpoint of the ETH-usd (T) order book. This suggests that market makers are uneasy and have reduced liquidity to avoid getting caught up in merger-related volatility. After the merger, liquidity increased rapidly and is now only slightly higher than pre-merger levels.

Chaos Market After Ethereum Merger

While Ethereum YTD (year to date) continues to underperform Bitcoin slightly, the expected decline in issuance may support its price despite a challenging macro environment.

Binance changes the trend of trading volume

Chaos Market After Ethereum Merger

Volume is one of the best indicators of a long-term bear market. The initial price slide is usually accompanied by a surge in volume as traders take advantage of (or suffer from) the volatility. However, as days turned into weeks, into months of subdued prices, trading volumes on most exchanges began to decline. However, when looking at aggregated volumes for the most liquid BTC and ETH pairs, we can observe that there has been no such trend since the beginning of the bear market in May. While weekly volume remains well below all-time highs, there has actually been a slight uptick in activity over the past few months.

Unfortunately, aggregated data can confuse exchange-level trends. When separating Binance from this aggregated data set, we can see a large variance in activity between the world’s largest exchange and the other 13 exchanges. Since Binance removed transaction fees for the Bitcoin/ETH pair, the trading volume of the Bitcoin/ETH pair has soared. For the first time, Binance’s market share far exceeds the combined trading volume of 13 other exchanges, including Coinbase, FTX, Huobi, Okex, and more. Since the beginning of 2022, trading volumes on all exchanges except Binance have actually trended down, in line with our bear market expectations.

Chaos Market After Ethereum Merger

Cancellation of transaction fees for the most liquid currency pairs is not affordable for most exchanges, so we may expect this trend to continue until the market corrects.

3. Derivatives

ATOM open interest surges in bullish run

Chaos Market After Ethereum Merger

Cosmos’ token, ATOM, was one of the few bright spots during a few months of sluggish cryptocurrency prices. Cosmos is a decentralized network of independent and interoperable blockchains that aims to be the “Internet of Blockchains”, enabling them to share data and tokens within their ecosystem.

ATOM is up more than 40% over the past four days, even though the coin is down 54% year to date (competitors like SOL and AVAX are down 82% and 85%, respectively). After the collapse of Terra, which was part of the Cosmos ecosystem, the development of a number of other projects began to take over its activities, including Kava, Osmosis, and Thorchain. Additionally, the team is widely expected to announce ATOM’s new tokenomics soon, which will reduce inflation and increase the utility of the token. Amid these positive catalysts, open interest has soared from less than $50 million in mid-June to more than $200 million now. The average funding rate has been trending upwards since early September, suggesting that the recent surge in open interest is skewed in favor of the bulls.

ETH financing rate has risen sharply

Chaos Market After Ethereum Merger

With the start of the ETHW airdrop, the ETH funding rate has risen sharply from the combined all-time low, and futures prices no longer need to take into account potential arbitrage. Investors take advantage of ETHW airdrops by combining their ETH spot long positions with ETH futures shorts, eliminating price risk while still being able to collect ETHW airdrops. This strategy also benefits from short futures trades if futures prices are not discounted to reflect the strategy. Once the merger is successfully completed, the airdrop of ETHW takes place and the futures are back close to the spot price, so the funding rate moves sharply towards neutral again.

4. Macro Trends

Higher-than-expected U.S. inflation intensifies Fed rate hike bets

Chaos Market After Ethereum Merger

Macroeconomic headwinds continued to weigh on financial markets. This comes after higher-than-expected U.S. inflation in August sent both cryptocurrencies and stock markets tumbling. Headline inflation rose 8.3% year-on-year, slightly lower than the July figure. However, monthly core inflation rose 0.6%, almost double the forecast. Core inflation, which excludes volatile food and energy prices, is considered more sticky and cost-hedging than headline and energy inflation. Concerned that the process of lowering inflation will be slower and more painful than expected, the Fed has sharply adjusted its current top rate above 4%. The Fed is widely expected to raise interest rates by another 75 basis points at its meeting this week, while bets are also increasing that the Fed will do so by 75 basis points.

Bitcoin’s correlation with bonds, stocks rose in September

Chaos Market After Ethereum Merger

Bitcoin’s correlation with bonds and stocks returned to an uptick in September after falling in the summer. Inflation uncertainty coupled with Fed tightening has led to a historic decline in both risk and fixed income assets, challenging traditional approaches to asset allocation. The iShares Aggregate Bonds ETF, which tracks the U.S. investment-grade bond market, is down 12% this year, the Nasdaq 100 is down 28%, and Bitcoin is down more than 50%. Recent research suggests that persistently high and more volatile core inflation may be one explanation for the positive correlation between bonds and risk assets over the past few months, as inflation has had a negative impact on all asset classes.

Posted by:CoinYuppie,Reprinted with attribution to:
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