Buy on rumor, sell on news.
The Ethereum merger went off without a hitch, but prices immediately after disappointed investors. I do a quick dip here to check the temperature of anything on-chain.
The funding rate becomes positive
In the run-up to the merger, funding rates on Ethereum have reached historic lows. It made headlines, but that was to be expected. With Ethereum holders receiving an ETH PoW token, this meant investors turned to long spot ETH and short futures in order to receive the token while removing price exposure.
Since this was an apparent arbitrage opportunity, the laws of simple market dynamics dictate that the funding rate must fall to reflect the outsized number of investors selling ETH futures in the market. merger in order to spot and receive the ETH PoW token.
Post-merger, historically low funding rates have now returned to normal levels – and even turned slightly positive. So nothing to see here and normal service resumed.
Why did Ethereum drop after the merger?
As I was having breakfast on Wednesday morning (toast and a honey croissant), Ethereum completed its merger – at block 15,337,393, to be precise.
ETH price traded around $1,598 and surged slightly to $1,620, up 1.4%. However, it then pulled back and as I write this, over my Friday morning breakfast (this time oats and blueberries), ETH is trading at $1,470, 8% below the level of the merger.
And so, the merger turned out to be a classic after-the-news sales event. Given that Bitcoin is only trading 2% below where it was at the end of the meltdown, there seems to be some underperformance for ETH.
Options also give a clue to bearish sentiment. There was a smile of volatility with bearish divergence visible as ETH approached. This means that when strike price was calculated against implied volatility, there was greater implied volatility (by more than 100%) at lower strike prices, showing that traders were betting on a storyline selling the news.
Looking at options open interest by strike price, there were also more puts than calls, meaning traders were betting on the price going down rather than up.
The Federal Reserve will ultimately dictate the price
Of course, all of this will be overshadowed by the key Federal Reserve meeting on September 20-21, when the Fed is expected to announce another substantial rate hike after the disappointing inflation reading this week.
Nonetheless, he insists that just because there is a significant event in the pipeline does not mean the price will rise. This is an absolutely classic example of a rumored buy-and-sell news event, which we see all the time in the stock market.
That said, in terms of the long-term future of Ethereum, the merger is now a thing of the past and it went well. This is a huge and very optimistic achievement for Ethereum as a whole. Jerome Powell and the economy just have to cooperate now!
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