Ethereum’s Merge has been touted as one of the most important events in the history of cryptocurrency, and apparently, crypto hedge funds have taken note. The Financial Times reported that placing bets about the future of ether around the Merge had become “one of the most crowded trades in crypto history.”

Using Options To Place Bets On Ether Prices

In the days and weeks before the Merge, fund managers loaded up on options on ether tokens, the native cryptocurrency of the Ethereum blockchain. Via those options trades, they placed bets on volatility or protected their funds against sudden moves leading up to the Merge.

Crypto enthusiasts had been waiting for the Merge for years. The move from proof-of-work to proof-of-stake made the Ethereum blockchain more efficient by validating transactions via users who staked their tokens rather than astronomical amounts of computing power.

According to the Financial Times, a cadre of crypto traders was betting that the switch to proof-of-stake would slash the Ethereum blockchain’s energy usage by up to 99%—something that had been widely publicized to happen before the Merge.

Those bets also suggested that mainstream investors may be more likely to adopt ether now that the network’s energy usage has been cut dramatically. Before the switch, Ethereum used roughly the same amount of energy as Finland.

Most Ether Trades Placed Via Options

Leading up to the Merge, James West, CEO of crypto derivatives exchange Globe Exchange, declared that those bets amounted to “one of the most crowded trades in crypto history.”

He explained that many of the trades were placed in the options market, adding that “a lot of smart money” was buying—and betting that a successful transition would raise the price of ether.

According to the Financial Times, the exchange Deribit, which processes 97% of the open interest on ether options on exchanges, saw the number of outstanding option contracts rise from 1.2 million at the beginning of the year to over 4.6 million by last Wednesday.

Approximately 80% of those contracts were call options, amounting to a bet on prices rising but with the option rather than the requirement to buy ether at a fixed price for a certain period of time. The rest of the contracts were puts, amounting to bets on the price of ether falling.

Both types of contracts provide a way to bet on price moves while offering protection in case things don’t go as the trader expects.

Bullish Sentiment

Deribit Chief Commercial Officer Luuk Strijers told the Financial Times that the mix of options was a sign of “massive bullish sentiment.”

He also called attention to another popular trade around the Merge, which involved attempting to profit from massive volatility around the event—regardless of whether the price move was up or down. With the ether price down 20% over the last five days, this volatility trade is looking like the big winner, at least for now.

Some traders had even more specific bets regarding ether volatility, placing bets that the cryptocurrency would rise sharply leading up to the Merge and then selloff afterward. This strategy involved selling longer-dated calls that would pay out at $3,000 and then using that transaction to purchase shorter-term call options that would pay out if ether hit $2,500.

However, this strategy hasn’t paid off at all. The Merge occurred on Thursday, Sept. 16, but the ether price has been tumbling since Sept. 10, covering the days before the Merge and the day after. It remains to be seen whether ether will continue to sell off following the Merge, but the cryptocurrency certainly didn’t rise sharply in the days leading up to it.

Tyr Capital Chief Investment Officer Ed Hindi, who serves as a market maker in crypto options, told the Financial Times that many traders who bet on a sharp rise before the Merge and a selloff afterward raced to cover their positions.

The trade would work against them if the ether price climbs sharply after the Merge because it would trigger the options they had sold, but that hasn’t happened so far. Hindi added that the market was “way too bullish” leading up to the Merge and “way too bearish” after.

Shorting Ether Around The Merge

Other traders bet that the price of ether would fall this week, potentially due to a delay in the Merge or technical problems with it. This strategy amounted to shorting ether using futures contracts to bet on a price decline, and it also offered protection against certain price movements.

Data from Kaiko Research on ether’s funding rate, which measures the direction of futures positions in aggregate, was at its lowest level in over a year before the Merge, averaging -0.6%. Such a low level typically suggests investors are focused on shorting the asset.

Some traders hoped that owning some ether while shorting its futures might enable them to buy some additional tokens while protecting them from volatility. Investors who owned ether at the time of the Merge were entitled to extra tokens from the continuation of the proof-of-work blockchain after the event.

There was a hard fork of Ethereum after the Merge, allowing a proof-of-work chain to continue after ether’s transition to proof-of-stake. The new proof-of-work chain is now called ETHPoW.

Before the Merge, miners who had invested large sums in equipment to mine the original ether cryptocurrency had pushed for a proof-of-work version of the blockchain to continue after the Merge because they would no longer be able to mine ether after the transition to proof-of-stake.

ETHPoW Tokens Not Working Yet

KPTL Arbitrage Management Founding Partner Jay Janer owned some ether while shorting its futures because he felt that trading options had become too expensive. He said that if the fork occurred, he would receive the proof-of-work token for free.

However, those ETHPoW tokens have plummeted in value since the Merge, falling as low as $9.50 due to technical problems with the fork.

Of course, we’re still in the early days after the Merge, so it remains to be seen where the prices of ether and ETHPoW will go in the coming days and weeks.

This article originally appeared on The Tokenist

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