In September 2022, Ethereum finally shifted from a proof-of-work algorithm to a proof-of-stake consensus mechanism. The event is widely known as The Ethereum Merge, and we have been seeing in recent news that the Ethereum futures market is exerting a thorough dominance over the spot market since July 2022. Many attributed this outright dominance to speculation about Ethereum Merge – however, even after the Merge is successfully completed, the futures market is still continuing its dominant streak.
In this detailed article, we will take you through everything you need to know, about the Ethereum futures market vs its spot counterpart.
Ethereum Futures Market – A Brief History.
Earlier in 2022, when the crypto winter came down on all of us, the volume traded in the Ethereum futures market had dipped significantly.
The graph embedded above, the Ethereum spot-to-futures ratio, is arrived at by taking the total volume of Ethereum tokens traded on the spot market and dividing it by the volume of the Ethereum futures being traded on the same day. The lower the ratio is, the more dominant Ethereum Futures are over the Ethereum spot market.
However, as is evident by the graph, speculations about the Ethereum Merge did play a huge role in the increase in the Ethereum futures volume. As news about the Ethereum Merge began to spread like wildfire and the potential rumors of miners setting up to oppose the Merge abound, an Ethereum split seemed to be on the cards, driving up the activity on the futures market.
After the Ethereum Merge, you can see a slight lull in terms of volume traded, but you can see the dominance coming back again in full force after the 10th of October.
Why? Let’s discuss that shortly.
Before that, however, it is important to understand the relationship between the Ethereum futures and spot markets.
Ethereum Futures Market vs. Spot Market
Typically, regardless of the asset being traded, be it commodities, currencies, or even cryptocurrencies for that matter – if the spot market sees a substantial volume of that asset being traded, one is bound to see a significantly higher volume of trades in the futures market simultaneously.
In the Ethereum spot market, users will be able to buy or sell Ether at the current market value, and the ownership of the tokens would transfer immediately. Shorting and profiting off negative price movements is a little too complex.
This is not to mention the high barrier to entry of actually purchasing Ether. Should you want to profit significantly off the price movements, with little barrier to entry, you would have no other choice but to use leverage.
Smart traders use the leverage effectively and ensure they profit off both positive and negative price movements in the Ethereum derivatives market instead of the spot market.
The advantages of leverage, combined with the lower barrier to entry make the Ethereum futures market in particular, among other Ethereum derivatives, a highly lucrative option. In normal circumstances, the volume of the futures market should always be higher, when compared to the spot market.
The Recent Surge
If you’ve been following this article closely, you’ll know that there is a sudden increase in the volume of futures trading, as opposed to the spot market. While, at this point, all most of us can do is speculate – the rumors of a potential fork in the Ethereum world have driven the futures market even more. With the threat of censorship looming above all our heads, how Ethereum reacts to the threat of sanctions will definitely be closely monitored by Ethereum derivatives and spot traders all across the world.
When speculation about the future of a particular asset begins, the first place where the traders go to make their bets is in the futures market. The one-month and three-month Ethereum futures volume might go above that of Bitcoin’s once again in the near future. The last, and only time, this has happened was actually quite recent – during the very period that we’ve covered in this article – in the July to September 2022 timeframe, due to the speculations of the Ethereum Merge, and a different fork in the Ethereum blockchain.
What do you think of the continuing dominance of the Ethereum futures market over the spot market? Do you have any thoughts you’d like to share with us? Do let us know down below, or hit us up on our socials – we’ll be looking forward!
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