Ethereum Trading: The Promise of the Crypto-Market

ethereum-trading-crypto-internet-bull-reportEthereum looks to be dominantly profitable in the cryptoasset marketspace, as Bitcoin returns plummet following an impressive price rally.

Many investors confuse the major crypto-currencies as operating off of the same purpose: to be a cryptographically encrypted public ledger that acts as a decentralized means of exchange.

While Bitcoin and Ethereum share the ledger status, the chief difference lies in the intent of use of each cryptoasset.

Bitcoin’s encrypted data is used to ascribe a monetary value, whereas Ethereum’s encrypted data creates a utility value through access for purchased contracts on the Ether Blockchain space.

The difference of use became especially important in the price rally of the following week; Bitcoin reached a record-high correlation with gold at 68.9% correlation. After a 3 week period of appreciation of Bitcoin’s value to $12,118 by August 7, Bitcoin saw a continued four day stagnation in price.

Cryptocurrency researchers suspect that the gold pullback, as a result of the recent Treasury bond yield, coincides with the recent stagnation of Bitcoin prices. This relation indicates Bitcoin is in fact a strong medium of exchange, holding to shifts in market rates.

However that property comes at a cost. As analysts predict that Bitcoin may suffer a major price decline from mass equity sell-off as a result of coronavirus stimulus uncertainty.

While Ethereum is suffering a similar price decline, its potential value rests in its value of contract exchange, which has been emboldened through Ethereum’s adoption of a proof-of-stake model.

This model validates transaction of Ethereum through the staking (less intensive mining) of the currency in exchange for token rewards (like a cash-back reward).

The proof-of-stake model acts in contrast to the proof-of-work model of Bitcoin: a model that validates transactions of the currency through cryptographic puzzles. Cryptography as a means of validation hinders the rate of exchange of Bitcoin, and anchors its value to the greater crypto-market.

The yields of a model of Ethereum staking could generate between 3-5% of returns, and with  a measured 30-day volatility of around 1.8%, market optimism in the currency’s trade is overflowing. With the transition of validation models, a freeze of Ether assets is unavoidable.

To capitalize on Ethereum yields and bypass the limited supply, crypto traders are looking to derivatives as a remedy.

Exchanges have made strike-price listings of Ethereum assets for investors to make option calls. Panama-based Deribit exchange, the largest cryptoasset exchange by trading volume, has set strike-prices of $1200 by December 25. COO of Deribit, Luuk Strijers, justified optimism of the price prediction stating:

“Volumes have been decent and open interest [open positions] is over 2,500 contracts already, indicating some traders believe ETH can potentially show a price move of over 180% in five to seven months,”.

At its current trading price, Ethereum has close to a 200% gain on a year to date basis. The impressive price rally is attributed to the deep out of the money options.

ethereum-track-ibr

We conducted an options pricing test using the Black Scholes model, accounting for Value at Risk, time until the strike price is reached, 30 day volatility, stock, and strike price.

Since the strike price is higher than the share price we calculate for an option call, or the right to buy the asset within the time til strike price is reached. This calculation accounts for the purchase of one unit of Ethereum (on most exchanges you can buy whatever fraction of the currency you wish) .

We found that the right to purchase, given a share price of $375.24, would be approximately $375.24. 

Assuming you make that decision, concentration on an Ethereum based portfolio could mean a 13.7% loss on returns (using Value at Risk calculations).

ethereum-var-tradingNonetheless, riveting gains and an increasing derivatives market make Ethereum a worthwhile cryptoasset investment.

 

Noah Hill

Equity Research Analyst

Noah Hill is a rising senior at Boston University, majoring in economics and minoring in computer science. Noah is passionate about data science, statistical analysis, and financial markets. As an active participant in the VentureCafe Initiative, Noah has associated himself with emerging leaders in the FinTech community, understanding both the passion and technology that drives the future of investment management/analysis. As a quantitative analyst in his Finance Club, he has collaborated to provide comprehensive investment strategies for a $650k student-run fund. With this background, Noah places an emphasis on statistical modelling and the impact of sentiment when deciding on an action to take with an equity. In his spare time, you can find Noah singing opera or reading up on political philosophy.

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