Ether's $3K Breakout Partly Fueled by Dealer Hedging, Analyst Says

Dealer hedging, a market dynamic that accelerated bitcoin's (BTC) uptrend in late 2023, is now influencing ether's (ETH) price.

Ether, the native token of Ethereum’s blockchain, peeped above $3,000 early Thursday. The breakout above the psychological barrier was partly aided by the hedging activities of market makers or dealers from the ether options market, according to Griffin Ardern, head of options trading and research at crypto financial platform BloFin.

Per Ardern, dealers or entities tasked with providing liquidity to order books recently sold many calls or bullish bets at $3,000, leaving them with a so-called negative gamma exposure. So, as ether rallied close to the said level, dealers bought ether in the spot/futures market to hedge upside risks and keep their overall market exposure direction neutral. The hedging activity added to the bullish momentum, lifting ether past $3,000.

A similar pattern played out in the bitcoin market in November, accelerating price gains above $36,000.

Market makers are entities tasked with providing liquidity to the order book. They are always on the opposite side of clients' trades and constantly buy and sell the underlying asset to maintain an overall market-neutral book.

"A large amount of negative dealers' gamma is concentrated around $3,000, so market makers need to hedge the risk here. Negative gamma means that the market maker sold many calls at the $3k strike," Ardern told CoinDesk. "To deal with this, market makers must trade in the direction of the price move – buy ether as prices rise."

"The hedging program took effect at around 6:48 a.m. UTC early today," Ardern added.

Ether topped $3,000 at around 08:55 UTC, rising to a high of $3032 by 09:50 UTC, data from charting platform TradingView show.

Back in mid-2023, market makers in both BTC and ETH options markets held a positive gamma exposure and constantly traded against the price direction, thereby arresting price volatility.

Dealer activity, however, became a positive force for bitcoin in the final quarter as ETF optimism fueled investor demand for calls, exposing market makers to price rallies. More recently, Ethereum's impending Dencun upgrade and spot ETF narrative have done the same in the ether market.