Blofin: Macro analysis of the reasons for the recent skyrocketing of Ethereum, what is the market outlook?

Original compilation: Wu said blockchain

Original compilation: Wu said blockchain

The skyrocketing price of ETH seems to be caused by Gamma Squeeze, but judging from the available data, the current price increase still lacks sufficient support.

Under the influence of last week’s explosive CPI and the expectation of the Federal Reserve’s 100 basis point interest rate hike in July with a probability of more than 80%, the bearish sentiment in the encryption market has dominated the market, and the price of ETH once hovered on the edge of $1,000. Many investors estimate that before the Fed's boots hit the ground, it will be difficult for ETH's market performance to improve.

However, the price of ETH saw an unexpected surge over the weekend. In four days, the price of ETH has increased by more than 40%, while the price of BTC has increased by less than 10%. Derivatives shorts are complaining: more than $600 million in Delta 1 contract shorts were liquidated, and among the well-known sellers in the over-the-counter crypto options market, Ribbon Finance alone had an extra notional value of $57 million overnight. USD ETH options at-risk position.

Compared with the "bull market" in the encryption market, other risk asset markets have not significantly followed the performance of encrypted assets to pick up. US stocks are still fluctuating at a low level; while the emerging market indexes are not out of the falling range. This seems counterintuitive: usually, a sharp rise in the price of risky assets occurs during a liquidity easing cycle, but rarely during a liquidity tightening cycle; this is especially true for riskier crypto assets.

The emergence of divergence often means a major change in the fundamentals of a certain underlying asset, or there are factors in the market that can manipulate prices to a certain extent. Considering that BTC and ETH are not stock indexes, it is not impossible to have a significant impact on prices when liquidity is poor and certain conditions are met.

Benefiting from the abundant derivatives in the encrypted market, it has become a common method for many institutions to influence the spot market through derivatives. For example, by shorting the perpetual contracts of several specific exchanges, the "directional blasting" of the index price can be realized. However, with the continuous improvement of the encryption market, the ways of exerting influence on encrypted assets are also evolving. Gamma Squeeze, which is widely known in the 2021 GME event, is one of the means.

Different from the previous methods, Gamma Squeeze has relatively stricter realization conditions and requires the cooperation of various derivatives and spot products, so the difficulty is relatively higher. But once it is successfully realized, investors can obtain rich non-linear returns with the blessing of derivatives.

Gamma Squeeze usually needs to meet the following conditions (both are indispensable):

• Bearish sentiment continues to dominate the market;

• The underlying assets are generally less liquid;

• The target has a relatively complete derivatives market;

• Certain bullish signals can guide market sentiment.

Based on the above conditions, let us review what has happened to ETH recently.

Under the Federal Reserve's continuous interest rate hikes, the prices of many encrypted assets have dropped by more than 70% year-to-date. With the decline in prices and the continuous shrinkage of liquidity, investors' enthusiasm for trading has generally declined, and the depth of the order of various spot exchanges has gradually bottomed out: on exchanges such as Binance, only a few thousand ETHs are needed to trade spot Prices pushed up more than 1%.

Since the beginning of 2022, investors' enthusiasm for ETH options trading has gradually increased. On the Deribit exchange alone, the open position of ETH option contracts has remained above 2 million contracts for a long time, and sometimes even exceeded 3 million contracts. A sufficient amount of option positions has the ability to have a significant impact on the encryption market; this is the premise for the emergence of Gamma Squeeze.

time until early July. At this time, the encryption market is already "everything is ready, only the east wind is owed." And the catalyst for the market’s bullish sentiment just happened to come: the probability of the Fed raising interest rates by 100 basis points decreased, which brought back the risk appetite of risk asset investors, and the arrival of ETH Merge further triggered market sentiment; Gamma Squeeze started.

Around July 16, bulk traders started to act, buying a large number of short-term ETH out-of-the-money options that expired in the current week and the next week. The maximum single transaction amount even reached 10,000 contracts, and the rights of each transaction Gold is more than 100,000 US dollars.

For market makers, they need to buy spot or long perpetual contracts for hedging while selling call options to maintain risk neutrality. However, due to the limited size of the order book on the exchange, a large number of buying behaviors by market makers pushed up the price, making some options go from out-of-the-money to in-the-money; this brought additional risk exposure. Market makers have no choice but to buy again; thus, the price of ETH starts to rocket up.

At this time, retail investors noticed the price change, so they began to speculate whether it was due to the benefits brought by ETH Merge, and traded on it. On the premise that the Federal Reserve calmed the market, the wind bias of retail investors has increased, and a large number of options and spot purchases have followed suit, which has brought further pressure on option sellers and market makers: ETH's Gamma exposure has reached a historical record new highs.

As of July 19, the Gamma exposure of ETH has stabilized at around 1 million. This means that if the price of ETH rises by 1%, the market maker needs to buy an additional $1 million worth of ETH spot or equivalent perpetual contract positions to hedge the exposure generated by selling call options, and the market maker's buying This will further stimulate price increases.

However, as prices move higher, investors' ability to push prices higher via Gamma Squeeze tends to diminish. On the one hand, due to the soaring demand for call options, the option price has risen rapidly, and the cost performance has been reduced; on the other hand, as the price rises, the liquidity situation has improved, and the price of ETH has increased by the same amount through options, perpetual contracts and spot The cost required for the amplitude increases in steps.

At the macro level, as liquidity has not improved, the implied forward rate of ETH has not changed significantly compared to last week. That means investors' overall bid ceiling remains relatively low under current circumstances. As buyers and sellers balance, both price and gamma exposure remain high, creating a "weird and interesting" steady state in a bear market.

There is no doubt that this steady state is temporary. With the arrival of delivery, the release of margin and hedging positions will bring considerable selling pressure. At present, only in the option contract due on July 22, there are accumulated positive deltas close to 90,000 ETH, which is even comparable to the quarterly contract due on September 30. The selling pressure after delivery can be imagined.

We cannot be sure whether the spot price can get enough support before the delivery date, but what is certain is that whether the price turns down or goes all the way up, it is relatively beneficial for volatility bulls. Considering that the Fed will raise interest rates soon, long volatility is still one of the relatively feasible strategies at present.