The next big event in the cryptocurrency market is Ethereum’s “Shanghai” upgrade, scheduled for March, that will enable withdrawals of over 16.5 million Ethereum (ETH) staked on the blockchain. .
The upgrade marks the Ethereum blockchain undergoing a major technological overhaul called “Merge,” switching from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism. It’s scheduled for the next few months.
Traders recalled that ETH, the second-largest cryptocurrency by market value, did not fluctuate much after the merge on Sept. 15 last year, and considered the upcoming upgrade “not an event.” may be
However, according to crypto options liquidity provider OrBit Markets, such a conclusion may be premature.
“This time it might be different.” Yang Zhiming, co-founder of OrBit Market and former head of Deutsche Bank’s Asia-Pacific derivatives division, told CoinDesk, “Merge is a purely technological change that will directly impact the economy. However, the Shanghai Upgrade will change the supply and demand of ETH in both the short and long term, and therefore will have a significant impact on the price of ETH.”
As the name suggests, Merge combines the previous PoW blockchain and PoS beacon chain. This all-important upgrade made Ethereum more green and set it on the path to becoming a deflationary currency, but it did not immediately affect the supply and demand of crypto assets.
The price of ETH dropped 10% on the day to $1,472, but volatility soon subsided and traded in a tight range between $1,300 and $1,400 for the next four weeks. ETH’s 30-day realized volatility dropped from an annualized rate of 85% to nearly 60% in the four weeks following the Merge, according to cryptocurrency data provider Amberdata. Realized volatility is a metric that measures the degree of price volatility observed over a specified period of time.
This “Shanghai” upgrade could immediately affect the supply and demand balance of Ethereum, making it even more unstable than after the Merge.
“It will be possible to withdraw and sell approximately $25 billion worth of ETH. With the upgrade, it is expected that the yield of staking will decrease, so investors who have been staking so far will be able to release it and It could move to other assets that offer better yields, which would put a lot of selling pressure on the ETH price,” Chimin said.
According to Saxo Bank, the entire staking balance of over 16.5 million ETH cannot be withdrawn on the day of the upgrade, but approximately 1 million ETH of staking rewards over two years can be withdrawn immediately.
As Saxo Bank’s Mads Eberhardt said last month, these ETHs could be liquidated in the market, resulting in price volatility.
Additionally, ETH could be volatile in the days leading up to the event, a sign that the market is acknowledging concerns about price volatility after the upgrade.
Ethereum Volatility Swap
OrBit Markets recently recommended Ethereum volatility swaps to its clients to benefit from the expected volatility spike in March.
A volatility swap is a forward contract on the future realized volatility of an asset in which traders bet on the extent of price movement rather than the direction of the price.
In traditional finance, swaps are primarily cash settled based on the difference between a predetermined fixed volatility, called the volatility strike, and the realized volatility observed during the period.
“For March volatility swaps (first fix March 1st, last fix March 31st), buy the swap at 70% vols, with a cap of 170% and a floor of 45%. will be,” Chimin said. “That means max profit is capped at 100vols and max loss is capped at 25vols.”
The volatility strike in this case is 70%. Whether the swap is profitable or loss-making depends on the realized volatility at the end of March. OrBit’s volatility swap consists of Circle’s USDC dollar-pegged stablecoin, with all gains, losses and collateral denominated in USDC.
“Volatility swaps are a very common and popular product in equities and forex, and are widely used by hedge funds and asset managers,” Chimin told CoinDesk.
｜Translation: coindesk JAPAN
｜Editing: Toshihiko Inoue
｜Original: Unlike Merge, Ethereum’s Shanghai Upgrade Could Bring Ether Price Volatility