The Ethereum Merge Completes: Traders to Unwind Bearish Bets?
- By Dalvir Mandara
- 3 min read
The merge is finally done. Completed at 6:43 UTC, ethereum’s transition from the proof-of-work to proof-of-stake consensus protocol has been called one of the most historic moments in crypto since the publishing of the original bitcoin whitepaper.
In a previous note, we highlighted important factors that should be bullish for ethereum post merge in the longer term. But how are markets reacting during the immediate aftermath?
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The merge is finally done. Completed at 6:43 UTC, ethereum’s transition from the proof-of-work to proof-of-stake consensus protocol has been called one of the most historic moments in crypto since the publishing of the original bitcoin whitepaper.
In a previous note, we highlighted important factors that should be bullish for ethereum post merge in the longer term. But how are markets reacting during the immediate aftermath?
After hotter-than-expected inflation data for August sent crypto markets off a cliff on Tuesday, ethereum stabilised around $1,600. The merge faced no technical glitches, which is positive. Many exchanges such as FTX and Binance that halted deposits/withdrawals during the merge have now resumed both. Ethereum was up around 2% after the merge, but price action has been relatively muted (Chart 1).
We expect near-term volatility as the market unwinds hedges made against potential technical issues. Indeed, the average funding rate for perpetual futures reached lows of around ‑0.45% in the hours before the merge (Chart 2). Since then, funding rates have been climbing and are currently around -0.11%.
Negative funding rates imply that shorts pay longs: in other words, traders paying a premium to hold short positions. That funding rates plummeted before the merge is evidence investors were likely hedging their risk exposure to the merge. There is always the risk of a short squeeze as traders are forced to cover their short positions or are forced into a margin call should ETH rise.
