Hedge funds compete for bets on the result of the Ethereum Merge

The upcoming change of Ethereum blockchain to a new, more environmentally friendly system has triggered a hedge fund trading rush, which places bets before one of the greatest events in the short history of cryptocurrencies.

dealers have options on ether tokens-the flagship of cryptography-Coin trade with Ethereum-betting for price volatility or protection against sudden strong movements from the "merger".

The merger was a long-awaited event in the crypto industry and will change the way new transactions are verified on the Ethereum blockchain.

A group of dealers rely on the change to a new system will reduce the energy consumption of the network by up to 99 percent, which opens up ether token for mainstream investors who have so far been having to look after a network with approximately equally high energy consumption from Finland.

"This was one of the most frequented trades in crypto history," said James West, Managing Director of Globe Exchange, an exchange for crypto derivatives.

Many of the trades were placed on the option market, where West said: "Buy a lot of clever money [IS]", whereby many expect a successful change to drive up ether prices.

The total number of the outstanding option contracts on the Deribit stock exchange, which makes 97 percent of the open interest in ether options on the stock exchanges, rose from 1.2 million to over 4.6 million to Wednesday.

Around 80 percent of these contracts are call options-a bet on a higher price, in which an investor has the opportunity to buy ether for a fixed period for a fixed price-while the rest of Puts or bets are at lower prices. According to Luuk Strijers, Chief Commercial Officer from Deribit, this is a sign of a "massive house determination".

Some even believe that the merger could help to suppress Bitcoin as the greatest cryptocurrency in the world. The total value of the Bitcoin in circulation is USD 390 billion compared to less than $ 200 billion for ether, according to the FT Wilshire Digital Assets Dashboard.

"The mere expectation that ether Bitcoin" could "fulfill itself and become unstoppable," said Anders KVVAMMEN Jensen, co-fund manager of the AKJ Digital Assets Fund, who said that funds in which he invests with options on the merger.

According to Strijers, some investors have now built up option transactions to try to benefit from the potentially enormous price volatility of the fusion, regardless of whether this price movement is done up or down.

But the industry hype around the merger was so great that other dealers had set up strategies that rely on the fact that the price of ether would increase sharply before the event, but would be sold out if the merger came about.

As a result, some short-term call options bought the outparted when the ether reached $ 2,500, and financed this by selling longer-term calls with a payment of $ 3,000, according to Ed Hindi, Chief Investment Officer at the HEDGEGENTS TYR Capital, which acts as a market manufacturer of crypto options.

This trade has not yet developed as expected. While the price for Ether from less than $ 1,000 in June rose to $ 1,600 this week, this is still a good distance from where the short -term options would pay off. According to Hindi, retailers have tried to cover their positions for fear that they could now be hit if the ether increases sharply after the merger and trigger the options they have sold.

The market was "far too optimistic" before the merger and "after the merger much too bearish," he said.

Many investors who already keep ether tried to protect themselves from a sale if the merger does not come about, for example if it delays or has technical problems by also bet with futures contracts that the price drops. This type of trade, known as shorting, effectively protects you from price movements.

According to Kaiko Research, the so-called financing rate, a measure of the direction of the collective futures positions of the dealers, is in ether with an average of 0.6 percent at the lowest level in more than one year. This usually signals that investors focus on going shorts.

retailers also hope that this bet keeps ether while they could shorten the futures, it could enable them to collect some additional tokens while protecting them from market volatility. Investors who hold ether at the time of the merger are entitled to tokens that are still based on the older transaction processing system, which is known as a proof of work.

While the Fusion Ethereum is supposed to switch to the more energy-efficient proof-of-stake model, some market participants who oppose the change will continue to work on the old system-something that is known as "fork"-which means that these coins could keep some of their coins.

Jay Janer, founding partner of KPTL Arbitrage Management on the Kaiman Islands, runs this trade because he believes that trading with options has become too expensive. "If the fork occurs, we would receive the proof-of-work token for free," he said.

Additional reporting by Philip Stafford

laurence.fletcher@ft.com