The way futures for ether and bitcoin are currently priced shows traders expect ether to underperform bitcoin in the months ahead.
Whether spot ETH ETFs will go live this year remains a question, as the SEC has yet to clarify whether the cryptocurrency is a security or a commodity.
Market makers are likely to trade against ether price rises, capping the upside.
A week ago, Standard Chartered (STAN) said that ether (ETH) could surge to $4,000 in the next three months, potentially outperforming bitcoin (BTC), as the U.S. SEC could approve spot exchange-traded funds (ETFs) tied to ETH in May.
Traders, however, continue to prefer bitcoin over ether, anticipating continued weakness in the ether-bitcoin (ETH/BTC) ratio in the months ahead, futures data show.
The ETH/BTC forward term structure, calculated as the ratio between prices for ether futures and bitcoin futures over different maturities, has been sloping downwards, according to data tracked by crypto asset management firm Blofin.
“The downward sloping structure is backward, which means that traders expect ETH to perform weaker than BTC as time goes by,” Griffin Ardern, volatility trader from crypto asset management firm Blofin, said. “This shows investors are relatively more bullish on BTC’s performance.”
The ETH/BTC ratio surged 17% to 0.059 days after the SEC greenlighted the spot bitcoin ETFs. Ether’s outperformance primarily stemmed from hopes that the regulator will soon approve ether spot ETFs. While those hopes remain alive, the ETH/BTC ratio has since retreated to $0.053.
Futures traders may be concerned about the SEC’s categorization of ether as a security or commodity. The SEC’s mid-2023 lawsuit against Binance and Coinbase for violating securities law did not mention ether, which has convinced markets that the cryptocurrency will be deemed a commodity, a necessary condition for spot ETF approval.
Investment banking giant JPMorgan (JPM) is skeptical the SEC will classify ether as a commodity by May and sees no more than a 50% chance of the regulatory approving the spot ETH ETFs this year.
“There is a lot of uncertainty around the ETH spot ETF, mainly because its Proof-of-Stake could place it in a different asset classification from BTC. Greater uncertainty could also mean greater volatility,” Singapore-based institutional digital assets trading firm QCP Capital said in the Jan. 29 edition of the “Options Vol-cast” note.
The SEC recently delayed decisions on Blackrock (BLK) and Fidelity’s spot ETF applications. According to Bloomberg analyst James Seyffart, delays could continue, and the next key date is May 23.
Ardern said expectations for relatively weak ether performance likely stem from fears of market makers’ potential hedging activities.
According to Ardern, continuous selling of ether higher strike call options or bullish bets has left market makers with a net long gamma exposure. As such, they are likely to sell the cryptocurrency as price rises to hedge their exposure back to neutral. The hedging could inadvertently cap the upside.
“One of the reasons investors expect ETH’s relatively weak performance is that a large number of covered calls are dominating the ETH options market, and market makers are holding record positive gamma, which means that any price rise will be faced with strong resistance brought about by dealers’ selling hedging behavior,” Ardern said.
