In the next months, Ether (ETH) has the potential to double in value.
Ethereum's native token, Ether (ETH), has the potential to double its market value in the coming months thanks to the consolidation of supporting technical and key metrics. The price of Ether rose more than 9% on October 1, reaching nearly $3,300 for the first time in 10 days. The gains were largely due to a rebound in all major cryptocurrencies, including Bitcoin (BTC), which was up 9.5% to hit $48,000, its highest level in 10 days.
Ether-Bitcoin correlation with rising inflation in the US
The boom in crypto markets on October 1 coincided with the release of a US Commerce Department report on consumer spending. Data showed that the US consumer price index, the Federal Reserve's preferred measure of inflation, rose 0.3% to 3.6% yoy in August. This brought core inflation to its highest level in 30 years. Speculators tend to treat Bitcoin as a hedge against inflation, which explains the cryptocurrency's recent response to higher consumer prices in the United States. Meanwhile, Ether's 30-day average correlation with Bitcoin is close to 0.89, according to data from CryptoWatch, causing ETH to move almost in line with BTC.
A University of Michigan study, conducted Aug. 25 to Sept. 27, found that U.S. consumers' long-term inflation expectations rose to 3 percent, the highest in a decade. The results contradicted Federal Reserve Chair Jerome Powell, who for months called the rise in inflation "temporary" but recently admitted in a Senate session that higher consumer prices could remain intact until at least next year. As a result, inflationary pressures gave crypto bulls a reason to use Bitcoin as their primary hedge, with MicroStrategy CEO Michael Sailor suggesting that companies convert their cash holdings into BTC.
Drain power supply
Ethereum underwent a network hard fork upgrade on August 5, which further boosted the bullish outlook for Ether thanks to the classic law of supply and demand. The upgrade, called the London Hard Fork, introduces an upgrade protocol, EIP-1559, which initiates the burning of part of the Ethereum network fee, called the base fee. So far, activation of EIP-1559 has permanently removed 410,404 ETH (about $1.32 billion) from active offerings, according to Watch the Burn.
Ethereum is also preparing to shift its consensus mechanism from Proof of Performance (PoW) to Proof of Promise (PoS). As a result, a betting pool has been launched that allows users to win prizes and increase their ETH holdings when they lock in 32 ETH for a certain period in official PoS smart contracts. So far, the amount of ETH paid into Ethereum 2.0 betting contracts has increased from around 11,500 in November 2020 to 7.82 million ETH today. However, the transition has temporarily withdrawn 7.82 million ETH from circulation.
On the other hand, the total number of ether tokens held on all crypto exchanges dropped to a record low. CryptoQuant data shows the exchange now holds only 18.1 million ETH, compared to 23.73 million ETH last year. A declining ETH reserve indicates that traders may want to keep their Ether tokens rather than selling them for other assets, as the supply for investors looking to enter the Ether market may decrease, making ETH more valuable.
Cup and handle
The mix of lower supply and higher demand acts as a bullish stop on the price of ether. There is now more evidence of an upward break of the cup-and-handle model on the Ether chart for a longer timeframe. The cup and handle are a continuous bullish pattern, including a rounded bottom and a downward channel adjustment, as shown in the image below. The goal of obtaining the construction is usually for a length equal to the maximum height of the cup. Given that the cup resistance level is close to $4,000, a break from there could take ETH to over $6,000, which is almost double the current price. The price of Ether (ETH) has seen a lot of volatility lately and to the surprise of many traders, the $4,000 level continues to offer significant resistance. Currently the price corresponds to the upward channel that started in August. However, every time that support is tested, the risk of an aggressive correction increases. With that in mind, the $340 million option expiration on October 1 is likely to be dominated by neutral bearish options.
The Bulls have made the bigger expiration bets, but they seem overly optimistic about October 1, so their $215 million call (buy) option is getting closer and closer to the expiration date. It is possible that Ether will fall victim to its own success as the search for decentralized funding applications (DeFi) and irreplaceable token cuts (NFT) continues to clog the network. This caused the average gas cost to exceed $20 in the last ten days. Notice above how OpenSea, NFT's largest marketplace, accounted for over 20% of Ethereum's total gas consumption in the last 24 hours.
Polygon co-founder Sandeep Nailwal analyzed the overwhelming demand for blockchain transactions and said it was only a matter of time before Ethereum overtook Bitcoin as the dominant Layer 1 protocol. However, negative news continues to emerge, as Ethereum's fourth largest extraction pool will cease operations in China citing “regulatory guidelines”. In addition, SparkPool, the second largest pool of Ether, will also cease operations this month. As for the $340 million option expiring on October 1, bulls will have to raise the price above $3,000 to avoid any significant downward pressure.
Police make more bets, but there's a catch
The release to invite ratio of 1.74 represents a small difference between a $215 million call (buy) option and a $125 million put (sell) option. This broader view needs to be analyzed in more detail as some of these bets make no sense given the current price of $2,800. Below are the four most likely scenarios for the price of Ether. The imbalance, which benefits both parties, is a theoretical advantage of expiry of the term. Depending on the expiration price, the number of active calls (buys) and approvals (sales) varies:
Between $2,400 and $2,500: 0 calls against 38,050 times. The net result is $95 million for protective instruments (bears).
Between $2,500 and $2,800: 100 calls for 22,300 times. The net result is $60 million for protective instruments (bears).
Between $2,800 and $3,000: 2,300 calls for 13,800 times. The net result is $33 million for protective instruments (bears).
Between $3,000 and $3,200: 9,600 calls for 6,700 times. The net result is balanced between bears and bulls.
This rough assessment takes into account that call options are used exclusively in bullish strategies and set options are used in neutral trading. However, investors can use more complex strategies that usually involve different expiration dates.
The police are broken one way or another
The bears have absolute control over the October 1 expiry and have sufficient incentive to continue pushing the price below $2,800. However, it should be borne in mind that in the case of a negative price trend, as is the case with Ether now, sellers can cause a negative 2% move by making big offers and aggressive selling. On the other hand, gains require a positive 7% change in the price that takes Ether above $3,000 to offset the option expiry on October 1. It is impossible to calculate how much a trader would have to spend to manage the market in this way, even though it seems like an enormous task. Unless there is a surprise before October 1st, the price of Ether will continue to trade below $2,800.