Wall Street Traders Love The Merge… For Now

The Merge has emerged as the storyline of the summer. And DeFi bulls couldn’t be happier as anticipation for Ethereum’s historic upgrade crowds out the doomstruck headlines of the bear market.

Even Wall Street appears to be getting excited about Ethereum’s switch from a Proof-of-Work system of blockchain maintenance to one based on Proof-of-Stake.

“ETH, for its part, is being watched extremely closely as The Merge approaches,” Philipp Pieper, the co-founder of Swarm, a crypto exchange based in Berlin, told The Defiant. “The move at this scale could be nothing less than ground shaking.”

Betting ETH Will Double

Long bets in the ETH options market, which draws institutional investors, are outpacing bearish positions, according to Glassnode. There’s more than $300M in open interest for calls to buy ETH at a minimum level of $4,000.

That means sophisticated investors are betting ETH will double by Sept. 30, when the options expire.

The options data comes from Derebit, which contributes 97.47% of ETH options’ open interest, according to Coinglass.

Investors like narratives, and Ethereum’s merge of its Proof-of-Stake Beacon blockchain and its mainnet, which is expected Sept. 19, packs a lot of punch. For starters, Ethereum 2.0 promises to lower the high gas fees that have been the bane of users until the bear market diminished network activity.

A Proof-of-Stake approach, which relies on tokenholders staking their coins to validate transactions on a blockchain, is attractive to institutional investors, said Jeff Schumacher, founder and CEO of digital asset platform NAX Group.

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“It’s more about how proof of stake brings a reliability to fee structure that makes everyone more comfortable,” Schumacher told The Defiant.

The Merge also further differentiates Ethereum from Bitcoin. By providing devs and entrepreneurs with more tools and network power to build DeFi projects, Ethereum looks more like a software play.

That contrasts with Bitcoin’s design as an alternative form of money free from central bank control. The market has exposed the proposition as unrealistic given Bitcoin’s failure to be the inflation hedge it should have been during the last few quarters.

More Attractive

The Ethereum narrative is winning over the bulls: ETH has soared more than 45% in the last 30 days compared to Bitcoin’s increase of 11%, according to CoinGecko data.

Moreover, The Merge also sets up a fresh storyline for Ethereum as a green cryptocurrency. Because the Proof of Stake approach minimizes the competition between miners that drives Proof of Work, it demands far less computing power to operate. According to the Ethereum Foundation, the network will cut its power consumption by an astonishing 99.95%, which means Ethereum won’t contribute to global warming the way Bitcoin does.

This development may make Ethereum more attractive to institutional investors committed to ESG, which stands for environmental, social, and governance criteria used to select assets. Sustainable funds in the U.S. have amassed $343B in assets, according to Morningstar.

ESG-Friendly

“From our vantage, the transition to Proof-of-Stake is notably more ESG-friendly primarily due to its reduction in energy consumption,” Schumacher said.

Still, there is a possibility that The Merge, at least in the eyes of Wall Street, may be an event-driven trade rather than a long term story.

Looking beyond September, Glassnode found that implied volatility for October is much higher on the left side of the curve, indicating that traders are paying a premium for puts which expire on Oct. 28. Puts are contracts that provide investors the right to sell an asset at a set price, and usually indicates a bearish bet.

Teddy Woodward, who worked as a trader in Barclays’ investment bank division prior to co-founding Notional, a fixed-rate lending protocol, is bullish on ETH over the long-term. Yet he says the derivatives market is signaling The Merge may be a sort-term pop.

“​​I expect the price to rise going into the event based on speculative flows, not long-term buying, so I think it will probably be a ‘sell the news’ trade in the short-term,” he told The Defiant.