Two weeks after the Shapella upgrade was implemented on the Ethereum network, the cryptocurrency options market is signaling a higher perceived risk of downside volatility for Ethereum’s native token, Ether (ETH), than for Bitcoin (BTC), which is currently the market leader in the cryptocurrency space.
Shapella Upgrade Fails to Sustain Ethereum’s Bullish Run
During Tuesday’s trading session, the options market for both Ethereum and Bitcoin displayed a preference for puts, which are essentially bets that the price of an underlying asset will decrease.
It is worth noting that the demand for these bearish puts was more pronounced in the Ethereum market compared to that of Bitcoin, pointing towards a heightened degree of bearishness among investors towards Ethereum.
As per Block Scholes, a company specializing in analyzing crypto derivatives, the out-of-the-money (OTM) puts for Ethereum with a one-month expiry and bearish sentiment were traded at a premium of five volatility points over the bullish OTM calls. In contrast, the OTM puts for Bitcoin were traded at a premium of three points over the calls.
In his research note on Tuesday, Andrew Melville, a research analyst at Block Scholes, wrote: “ETH’s [risk reversal] skew has now reversed its post-Shapella recovery relative to BTC options, now pricing OTM puts at a 5 vol premium to calls at a 1-month tenor. This suggests a return to the slightly more negative sentiment assigned to ETH that we have commented on throughout this year.”
Implied volatility reflects price turbulence expectations over a period, affecting options demand and premiums. Risk reversals track the difference between OTM puts and calls’ implied volatility, indicating market volatility direction. OTM options are determined by the underlying asset’s market price compared to the strike price.
Although the risk reversals for both Ethereum and Bitcoin markets had rebounded to near zero from negative after the Shapella hard fork went live on April 12th, implying a shift from bearish to neutral sentiment, Ethereum’s one-month risk reversal has consistently remained lower than Bitcoin’s. This suggests a relatively stronger preference for bearish puts in Ethereum.
It is important to note that the Shapella upgrade had initially sparked optimism among investors. Following the upgrade, Ethereum’s price climbed to $2,140, which was its highest point in 11 months. However, this optimism appears to have faded, with Ethereum’s price since retreating below $1,900.
It is unclear what factors are driving the bearish sentiment toward Ethereum, but it is possible that investors are being cautious due to the cryptocurrency’s previous price volatility and its relatively lower market dominance compared to Bitcoin.
Ethereum Receives Support from Wallet Provider Amidst Fading Optimism
Metamask, a wallet service provider that operates in a decentralized and noncustodial manner, has shown strong support for the Ethereum proof-of-stake (PoS) protocol.
Metamask users have locked up over 62,000 ETH tokens, which is worth about $114 million. This is a significant move, as many people are currently unstaking their tokens post-Shapella upgrade.
Staking is a process that enables anyone to lock their tokens to support validators on the network. In return, stakers are rewarded with ETH tokens.
Given that ConsenSys, the parent company of Metamask, has strong ties to the Ethereum blockchain protocol, it is not unexpected that Metamask is showing support for Ethereum. Joseph Lubin, the founder of ConsenSys, is also one of the founders of the Ethereum protocol, which makes it a natural step for the wallet app to engage in staking.
With the introduction of the Shapella upgrade, a new era was ushered in where stakers can readily withdraw and unstake their Ethereum tokens. This feature provides a convenient option for both crypto-native startups and entities within the larger financial ecosystem to engage in staking.
Metamask’s significant staking figures demonstrate its confidence in Ethereum’s long-term viability and the strength of its community. The platform’s commitment to PoS helps to ensure Ethereum’s security and the decentralization of its network.
Metamask’s involvement in the Ethereum ecosystem is a testament to the growing adoption of PoS protocols in the cryptocurrency space.
Here’s How The Predictions Before The Upgrade Materialize
The recent Shapella upgrade of Ethereum has been in effect for just over a week, and recent data has shed some light on the health of the ecosystem.
While some market participants were on the right track about the Shapella upgrade’s impact on pricing, others missed the mark. The latest data reveals that the network has distributed more than 1.3 million ETH ($2.52 billion), a significant increase from the previous week’s $617 million. Interestingly, roughly two-thirds of these withdrawals were rewards that were automatically distributed.
For validators which want to withdraw fully, there is an exit queue that limits the rate of withdrawal, ensuring the proof-of-stake network remains secure even in times of high demand to leave.
Prior to the Shapella upgrade, it was believed that the $34 billion in total staked ETH becoming more liquid wouldn’t have much of an impact on the price. Since several related derivatives were available to help ETH stakers mitigate their exposure before the unlock. Additionally, the validator withdrawal queue limits were expected to result in minimal impact on the sell-side pressure.
On the other hand, it’s worth noting that new validators can also join the network, and in the past week alone, there has been a net increase of approximately 18,000 validators. As the number of validators decreases, the staking yield rises, which could help to establish a balance.
The value of ether soared after the Shapella upgrade, hitting a high of over $2,100 on April 16. Nevertheless, the market is currently undergoing a correction that could erase a substantial portion of the month’s gains.
According to Rich Falk-Wallace, who is the CEO of Arcana, it would take at least a couple of years for the number of validators to drop from the current 536,000 to 100,000 if they keep leaving at the fastest rate possible.
Some traders who made bearish predictions for the impact of the upgrade have admitted defeat, such as popular Twitter pundit Kamikaze, who has now flipped “bullish.” However, Ether remains firmly within a long-term range established in May 2021, indicating the high correlation between the top two crypto assets.
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