Ahead of The Merge in September, several on-chain datasets point to a precarious demise for proof of work on Ethereum.
Will Ethereum Converge on Merge Day or Will the “Sell the News” Event Spread?
Estimated leverage ratio
The amount of leverage within the Ethereum ecosystem hit an all-time high heading into The Merge. The impact can be assessed by reviewing the estimated leverage ratios below. The Estimated Leverage Ratio (ELR) is defined by the open interest ratio of a futures contract to the corresponding exchange balance.
As you can see from the chat below, the ELR increased significantly in August. ELRs are An indicator that measures the ratio of open contracts pending execution to currency reserves futures trading platform. The graph shows that the ELR reached a record high of 0.28. This indicates that volatility can be high in the event of large price movements.
As you can see from the graph, there is little correlation between Ethereum and ELR in terms of price prediction. ELR’s new all-time high has not historically set a high or low for Ethereum.
However, the more leverage, open interest, and shorts participating in the market, the greater the potential for volatility. This is because liquidation can cause a snowball effect in either direction.
The funding rate is highly negative and correlates with other significant events in the ecosystem such as Covid-19, China’s miner ban, and the collapse of Terra Luna.
The merger could catalyze negative funding rates from early August onwards. Expectations for The Merge are high for anyone trying to guess prices in swing trading around events.
The chart below shows the percentage of the average funding rate set by exchanges for perpetual futures contracts. If the rate is positive, the long position will periodically pay out the short position. Conversely, if the rate is negative, the short position will periodically pay out the long position.
Funding has seen neutrality in recent weeks as interest rates have continually flipped between positive and negative funding, suggesting stability. However, negative funding was persistent and aggressive last week.
Current levels are in line with last summer’s miner selloff, which marked the bottom of the cycle, similar to Covid. Where shorts are bold, this historically marks the bottom of the cycle.
Since the beginning of May, the Ethereum futures market has seen a dramatic increase in open interest. Open interest rose from a baseline of around 3 million ETH and in August he reached a new high of 5 million ETH. This growth was primarily driven by a handful of exchanges such as his Binance, Deribit, OKEx, Bybit, FTX and CME.
The chart below shows the total amount of funds allocated to open futures contracts (in native coin ETH).
Comparing open interest in ETH units helps separate futures leverage growth periods from coin price changes. In USD terms, open interest is now at $8 billion, which is relatively low and comparable to the early bull market in January 2021.
As Merge Day approaches, the stage is set for one of the biggest days in Internet history. This data suggests we are on a roller coaster ride, and at the Ethereum mergewatch party on Sept. 14, he will be watching it live every minute using CryptoSlate. I can.
MetaMask, PolkaStarter, Xborg, DefiYieldApp, Swissborg, Coin Bureau, Crypto busy and many others will be participating. Don’t miss the exclusive location of Merge Day.