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ETH may face incoming volatility, how to play it?
Figure 1: ETH Price (Green) vs. Miners Balance (Brown)Source: Santiment A reduction of miners’ balances often considered as an early indication of the price that could have been peaked in the short-term. Conversely, when miners’ balance started to increase or an uptrend, the prices could have been bottomed in the near-term. It’s worth noting that this accumulation trend, even is confirmed, could be a medium/long-term trend, and the timing of that accumulation reflecting on price could be hard to determine. That’s why we need more evidence to back up our assumption, and the ETH amount in non-exchange top holders may provide another clue.
Figure 2: ETH Price (Green) vs. Amount in Non-Exchange Top Holders (Brown)Source: Santiment It seems that whales have been keeping their ETH holdings at a relatively high level since April 8. The May 10 selloff did not reduce much of their confidence, and that could be another sign that whales have been expecting volatility of ETH prices may soon going to increase, perhaps with a bias on the upside. Additionally, the social volume levels may give us a complete picture of how hot ETH or ETH 2.0 in the crypto community. Figure 3 shows the social volume of the term “ETH” or “ETH 2.0” on Telegram and Reddit. ETH has been on an uptrend since early May.
Figure 3: Social Volume of “ETH” or “ETH2.0” on Telegram (blue) and Reddit (red)Source: Santiment While the price implication of a digital asset with a higher social volume remained highly debatable, but one thing that we can confirm is, ETH or ETH 2.0 has been generating more noise among crypto communities, and that often generate volatility on the price of the given asset. That could be something that traders and investors want to put a close eye on. Favor ETH futures over options How traders and investors can capture and capitalize on the potential moves of ETH prices, that’s the million-dollar question. However, picking the right instrument to enter a trade could be more crucial than many traders and investors think. With the right tool, market participants may able to maximize the potential profile while minimizing their risks. In this ETH case, we know that the 2.0 upgrade will eventually arrive; it is just a matter of time, regardless of whether it's July or year-end. That’s why instruments like futures that have no time decay and fixed trading cost could be a better choice of weapon.
- No time decay – One of the essential elements when it comes to pricing options is the time value, and the value of the options contract decreases over time. If an investor wanted to catch an impending volatility increase of the price of the underlying, without knowing the time of that specific event happens, like this ETH 2.0 upgrade case, futures have edges over options, because futures have no time decay.
- Fixed trading cost – The margin cost of futures contracts with major crypto as an underlying are usually fixed, which means traders will know how much initial margin they need when they first set up a trade. For example, the initial margin of ETHUSD futures contracts on OKEx could be as low as 2% with a maintenance margin ratio of 1%. In contrast, option premium could fluctuate, in some cases, if the underlying asset is getting more volatile, options buyers may need to bear a higher option premium.
- Simpler pricing – Pricing an option contract sometimes could be complicated, and there were more variables that traders and investors may not easy to control and understand. Besides the time decay factor that we mentioned earlier, implied volatility could be another issue that options traders can’t ignore, yet it’s hard to control at the same time. IV is considered a gauge of the market's forecast of the likely movement of the underlying price. It has been a key element when it comes to options pricing. However, IV is also the part that is hardest to understand and forecast. In futures trading, there’s no such factor.
Figure 4: ETH Futures & Swaps Aggregated Daily Volumes and Open InterestSource: Skew Conclusion Market participants seem still looking for the next focus after bitcoin’s halving, and ETH 2.0 upgrade could easily become the next focal point in the crypto space. However, with unknown timing and multiple delay history, it could be challenging for investors and traders to capitalize on such an event. That is why derivatives like futures and swaps may help investors capture these opportunities and reduce their risks by employing the right strategy. Investors should construct their strategies according to their risk profile. Author: Cyrus Ip Research Analyst, OKEx