Ethereum’s Merge Has Traders Lining Up – To Go Short

Ethereum’s Merge Has Traders Lining Up – To Go Short
Jonathan Hobbs, CFA

over 1 year ago2 mins

If you hear a lot of people talking about Ethereum lately, that’s because of the big event that’s just around the corner. The “merge”, as it’s called, is penciled in for mid-September: it’s when the world’s No. 2 blockchain does away with miners and mining, and replaces them with validators who’ll put up ether collateral instead. That will transform Ethereum from a proof-of-work blockchain to a more energy-efficient proof-of-stake blockchain.

With all that excitement, you’d expect traders to be making moves in anticipation of a quick profit – and buying into ether futures, derivative products that track the price of ether. But many have actually been piling into short positions on those futures, betting that the price of ether will fall.

This chart shows the price of ether (blue line) and the average “funding rates” (green and red bars) that traders pay each day to stay in their ether futures trades. On August 30th, that rate dropped to negative 0.024% – meaning that short traders were paying that amount as a percentage of their trade size to stay short. Exactly how those rates are calculated is complicated, but generally, a negative funding rate means there’s strong demand from short traders – strong enough that they’re willing to pay money to be bearish.

The last time the funding rate got so low was in June 2021. A month later, there was a massive “short squeeze” in the price of ether, which helped blast it 120% higher in just two months. See, when futures traders have to pay money to stay short, they need the price to keep dropping to offset the funding rates they pay in order to stay profitable. So when the downtrend begins to stall, as it did in June of last year, they close out those positions in the only way they can – by buying back ether futures. Their exits (buy orders) squeeze the price higher, which draws the attention of new buyers and pushes the price higher still.

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