Ether's Deepest 'Backwardation' Since 2020 Crash Shows Traders Prepping for Ethereum PoW Split

Traders have been buying ETH in the spot market and selling ether futures to withstand volatility, creating the unusual dynamic.

AccessTimeIconAug 8, 2022 at 3:32 p.m. UTC
Updated Apr 9, 2024 at 11:49 p.m. UTC

Ether's (ETH) futures market showed "backwardation" on Monday, with three-month contracts trading at the widest discount to the spot price since the coronavirus-induced crash of March 2020.

Data provided by Skew showed Binance-listed three-month futures traded at a steep annualized discount of 6% to the spot price, while those on the OKEx and FTX exchanges changed hands at a discount of over 4%. The premium, or contango, evaporated early this month.

This so-called backwardation seemingly stemmed from traders taking short positions to protect their bullish spot market exposure from "Merge"-induced price turbulence and safely earn free money from a potential hard fork. Futures markets are typically in "contango," where contracts for future months draw a higher price than the spot level, representing the time value of money and cost of storage.

Ethereum's impending Merge – a supposedly ETH-bullish network upgrade that will combine the current proof-of-work (PoW) blockchain with the proof-of-stake (PoS) Beacon Chain that went live in December 2020 – is likely to happen in September. Last month, Ethereum founder Tim Beiko mentioned Sept. 19 as the tentative date for the Merge. Although ether is rallying ahead of the event, the upgrade may not be smooth.

Prominent Chinese miner Chandler Guo is against the Merge and favors maintaining a PoW version of the network post-upgrade. If Guo's movement gathers traction, the chain could fork or split into two, with the new PoS chain retaining ETH as the native token and the old PoW chain launching its own ETH PoW token. In any case, ETH holders at the time of the fork will receive the ETH PoW tokens for free.

"The ETH futures market has been digesting the possibility, as basis is currently negative, coalescing around the December 2022 expiry," said Ainsley To, a senior research analyst at Genesis Global Trading, which is owned by Digital Currency Group, CoinDesk's parent company.

"This reflects hedging demand from the popular trade of the moment –long ETH via the spot market to be eligible for the ETH PoW token in event of a potential fork, and hedging the exposure via ETH futures," To said.

Trades short futures contract, driving the market into backwardation.
Trades short futures contract, driving the market into backwardation.

Singapore-based crypto derivatives giant QCP Capital voiced a similar opinion last week, saying that "holding spot ETH would gain an additional valuable ETH PoW token without taking any price risk on ETH as the long position is hedged by the short futures."

QCP holds a large position in this so-called risk-free trade. Expecting the backwardation to deepen as the Merge nears, the firm announced on its Telegram-based channel that it intends to hold the position for some time.

Ethereum founder Vitalik Buterin doesn't expect a potential hard fork to have a lasting impact on the post-Merge proof-of-stake chain. However, some exchanges, including BitMEX, Poloniex and OKEx, have declared support for the possible fork. Tron founder Justin Sun has come out in favor of a potential fork, promising support for developing the existing Ethereum network following the Merge.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.