Forget Bitcoin. Interest in Aether is growing ahead of “The Merge”.

Investors have flocked


Ether

traded as a critical upgrade to one of the most critical crypto networks looks set to be big this month, setting the stage for volatility in the coming days and weeks.

Set to begin on Tuesday and conclude on September 20, “The Merge” is a much-anticipated and long-awaited sea change for the Ethereum blockchain network. Ether—second largest cryptocurrency after


Bitcoin

— is the native token for Ethereum.

The Merger is set to fundamentally change the way Ethereum works as it removes the “proof of work” system that underpins Bitcoin’s security and operations in favor of a “proof of stake” system. The move will make ether mining redundant, reducing the network’s carbon footprint and reducing the supply of tokens in circulation.

Both changes are expected to increase prices. Most cryptocurrency traders bet on it.

From June to August, Ether outperformed nearly every top-ranked digital asset by “a big margin,” a sign of strong interest in the run-up to the merger, according to Clara Medalie, director of research at crypto firm Kaiko. While gains have been dampened by the stock and cryptocurrency markets that hit in August — the two are correlated due to their sensitivity to changes in investors’ appetite for risk — Ether has still gained more than 50% since mid-July.

Bitcoin has been left in the dust. By nearly every metric, investor attention now consistently favors its smaller peers.

None of the Bitcoin products covered in the latest monthly digital asset management report from data firm CryptoCompare posted gains in assets under management or volume in August. Instead, Ethereum-based products dominated development. And for the first time since December, the

Grayscale Bitcoin Trust

lost its position as the most traded crypto trust product; the top spot went to

Grayscale Ethereum Trust
.

This shift in investor interest—and capital flows, with the average weekly inflow for Ether products at an all-time high in August—is beginning to be evident in key indicators of market sentiment and asset performance.

The Ether-Bitcoin ratio, which measures the Ethereum token’s performance relative to the largest digital asset, rose at its fastest pace ever from June to July, according to Medalie. Additionally, the 30-day volatility spread for Bitcoin and Ether has widened to its highest level in more than a year, indicating a strong divergence in market activity between the two assets, which is reflected in booming volumes. trading, Medalie said.

“Derivatives markets have also played a central role in Ether market activity,” says Medalie. “Permanent Ether futures recently broke all-time highs, suggesting traders are placing their bets ahead of the Merger.” Open interest refers to the total amount of open derivative contracts.

The vast majority of all digital asset trading takes place in the crypto derivatives market, where perpetual futures contracts or “perps” dominate and play a key role in both broader market price discovery and hedging. In addition, leverage – borrowed money – is widely available to derivatives traders.

So, as more money flows into the Ether derivatives market, price volatility is likely to worsen as traders change their bets and take new positions in the coming days as the success and popularity of the Merger becomes clearer.

“The number of future seats [denominated in Ether] The open currently represents a stunning all-time high, acting as a huge leverage in Ether’s price action over the coming weeks,” Conor Ryder, analyst at Medalie’s Kaiko team, said in a note.

And it’s not just day traders or crypto fanatics participating. The largest holders of Aether, the so-called whales, also get in on the action. Top whale addresses have moved a significant amount of Ether to exchanges, according to analysts at crypto exchange Bitfinex, with holdings at non-exchange addresses down 11% over the past three months. Moving crypto out of a private wallet and onto an exchange is a key precursor to trading.

So where is the sentiment now, less than a week before the Merge begins?

Perhaps the best indicator is in the Ether options market, according to an analysis by Kaiko, which currently shows what could be “the most obvious case of hedging that crypto options markets have seen.”

The market for Ether options expiring before the Merger is split almost evenly between calls – bets that prices will rise – and puts, which are bets that prices will fall. But that all changes for options expiring after the merger, with 79% of all options expiring after the network upgrade being calls. This is a bullish sign.

“Investors seem bullish on Ethereum’s long-term future as evidenced by options markets, but in the short-term they remain concerned about the possibility of a self-inflicted crisis,” Kaiko’s Ryder noted, citing the build-up of negative positions in Ether. futures contracts, which, like put options, likely indicate that investors are hedging their bets.

“The merger is one of the only events in crypto until the last moment that has not been supported by macros,” Ryder said. “It will be interesting to see if it triggers a breakout to a lower correlation with the stock market, for better or for worse.”

Write to Jack Denton at jack.denton@dowjones.com

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