Months ago, Ethereum’s blockchain underwent a technological overhaul dubbed the Merge, switching from a proof-of-work setting to a proof-of-stake consensus mechanism.
After the Merge on September 15, Ether’s price dropped 10% to $1,472. But the volatility quickly faded, and the prices traded in a narrow range of $1,300 to $1,400 for the following four weeks. According to Amberdata, Ether’s 30-day realized volatility fell from an annualized 85% to nearly 60%.
Ethereum’s Shanghai Upgrade – Unlike Merge
The Shanghai upgrade, set to happen in March, is expected to be the next significant catalyst for the crypto market. Yang Zhiming, co-founder of OrBit Market and former head of currency derivatives for Asia Pacific at Deutsche Bank, suggests that it is unlikely to be a non-event like the Merge. The Shanghai upgrade will change the supply and demand of ETH both in the short and long term, capable of causing significant impacts on the ETH price.
Effects of the Shanghai Upgrade on ETH Market
The upgrade may cause an imbalance in the demand-supply dynamics of the Ether market. With over 16.5 million ETH expected to become available for withdrawals and sales, staking yields are expected to decrease following the upgrade, causing investors who previously staked to unstake and move to other assets offering better yields. This would create significant selling pressures on the ETH price.
While the entire staking balance cannot be withdrawn on the upgrade day, more than 1 million ETH can be instantly taken out as staking rewards of over two years. These ETH could be liquidated into the market, bringing volatility in the price, as noted by Saxo Bank’s Mads Eberhardt.
Ether Volatility Swap
OrBit Markets recommends buying an Ether volatility swap to profit from the expected increase in volatility in March. A volatility swap is a forward contract on the future realized volatility of an asset, allowing traders to bet on the degree of price moves rather than the directionality of prices. Traders can enter a March volatility swap, where they buy the swap at volatility strike of 70% volatility [vols], capped at 170%, and floored at 45%. The maximum gain is 100 vols, and the maximum loss is capped at 25 vols.
The volatility strike is 70%, and whether the swap turns in profit or loss depends on the degree of realized volatility in March, which will be known at the end of the said month. The volatility swap is denominated in Circle’s dollar-pegged stablecoin, USDC. In other words, profit, loss, and collateral are all denominated in USDC.
Conclusion
Ethereum‘s Shanghai upgrade, set to happen in March, is expected to be the next significant catalyst for the crypto market. Unlike the Merge, which was a pure technological shift with no direct economic impact, the Shanghai upgrade will change the supply and demand of ETH both in the short term and long term, capable of causing significant impacts on the ETH price. Traders can use OrBit Market’s Ether volatility swap to profit from the expected increase in volatility in March.
