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Why can’t the merge update prevent the price of Ethereum from falling?

چرا به‌روزرسانی مِرج نمی‌تواند مانع سقوط قیمت اتریوم شود؟

Most analysts consider the approach of the Merge update on September 15 as the reason for the 90% growth of the Ethereum price after reaching the $880 range in June. However, there are indicators that even Marj’s update won’t prevent Ethereum’s price from falling in the future.

To Report Cointelegraph, despite the significant price growth between June and September, Ethereum is still trading 70% below its highest price in November 2021 (Mahar 1400), i.e. $4,590. A review of 3 bearish indicators of the Ethereum market will show why there is a possibility that the downward trend in the value of Ethereum will continue.

ETH/USD weekly price chart
Ethereum weekly price chart.

Buy with rumors, sell with news!

Based on data collected from the Deribit exchange by the Glassnode analytics platform, Ethereum option traders are predicting that the price of the digital currency will rise to $2,200 from the current $1,540 before the merger. Some traders even speculate that the price of Ethereum will reach $5,000, although there is not much enthusiasm for the post-proof-of-stake era.

A review of the Option Implied Volatility Smile (OIVS) index shows that for the post-merger era, there is demand among traders to use downside protection contracts. This indicator depicts the implied volatility of option trades for strike prices on specific expiration dates. Option contracts with higher profits cause more implied volatility.

Implied Volatility indicates the market’s expectation of volatility in the future. Implied volatility increases when investors believe that the price of an asset will decrease over time and the market will be bearish.

For example, checking the slope and the smile shape of the Options Expiry chart on September 30 (8 Mehr) helps traders to evaluate the cost of trading and the type of risks that the market considers them.

“Implied Volatility Smile” Chart Ethereum Option Trading Expiration on September 30, 2022.

The upward slope of the volatility smile indicates a large demand on the buy side for Ethereum call options expiring in September. This means that traders are willing to pay a premium to maintain their long trading positions.

Referring to the OIVS chart below and the Call or Put option of open contracts (Open Interest) at different contract prices, Golsnod analysts wrote:

After the merger, the left tail of the chart is priced significantly higher in implied volatility. This suggests that traders are paying margin to protect their put option contracts from being “sold on the news” after the merger.

Why can't the merge update prevent the price of Ethereum from falling?
“Implied Volatility Smile” Chart Ethereum Option Trading Expiry October 28, 2022

Simply put, Ethereum traders are prepared to hedge their trades in case of increased selling pressure on Ethereum due to the news.

contractionary policies of the Federal Reserve

Macroeconomic events, especially the contractionary policies of the Federal Reserve, could be the second reason for the fall in the price of Ethereum after the consolidation.

US Federal Reserve Chairman Jerome Powell last week emphasized the Federal Reserve’s commitment to contain inflation, saying that they will continue to implement contractionary policies until inflation is under control. In other words, Powell and his colleagues are likely to raise interest rates by 0.5 to 0.75 percentage points at their next policy meeting in September.

The positive and growing correlation of the digital currency market and traditional financial markets in risk-taking indicators against the prospect of a decrease in liquidity in the economy caused the recent news of an interest rate increase to have a bad effect on the price of Ethereum. For example, the daily correlation coefficient of Ethereum price and the Nasdaq stock market index was 85% on September 3.

Daily correlation coefficient chart of ETH/USD and Nasdaq
Daily correlation coefficient chart of ETH/USD currency pair and Nasdaq index.

Therefore, there is a high probability that the price of Ethereum will decrease along with other high-risk assets; Especially if the Federal Reserve increases the interest rate this month by 0.75 percentage points.

Ethereum’s big bearish flag

From a technical analysis perspective, Ethereum is forming a bearish flag pattern on its weekly chart.

A bearish flag pattern is formed when the price fluctuates within an ascending channel (with a parallel ceiling and floor) after a rapid and significant decline. According to the rules of technical analysis, after exiting the channel, the price will decrease by the length of the previous downtrend (flag bar).

Ethereum tested the flag’s lower trend line as support this week. The price of this digital currency in this range can again try to cross the upper trend line of the flag (around $2,500) or it can be dragged below the lower trend line by continuing its downward trend.

According to the factors we reviewed before and as it is clear in the chart below, there is a possibility that the price of Ethereum will fall to the target of the bearish flag pattern ($540) in September; A level that is nearly 65% ​​lower than the current price of Ethereum.

Bearish flag pattern on ETH/USD weekly price chart
Bearish flag pattern on Ethereum weekly price chart.

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