Market dynamics and challenges from ethereum ’ s merge : A market maker ’ s perspective
One challenge unique to crypto ETPs is hard forks
Author : Edd Carlton and Ruben Brons
Analysing the crypto market so far this year in the wake of the Terra and UST collapse , the conclusions are apparent – 2022 has not been crypto ’ s finest .
Despite a general bearish sentiment in the market , commentary from the Federal Reserve and ethereum ’ s price rally in the build-up to the highly anticipated merge fuelled the Bloomberg Ethereum Global index to increase by 43 % during the month of July . 1 In spite of the recent rally of bitcoin and ethereum , the aggregated market capitalisation of the crypto market is still down from just under $ 3trn in 2021 to $ 1trn , as of August .
Considering the performance of the underlying crypto market , as detailed above , it should come as no surprise that exchange-traded products ( ETPs ) tracking the underlying crypto assets are similarly presenting negative returns YTD . This would support the concept that the ETPs are doing what they were designed to do in tracking the underlying market and being priced correctly by market makers .
Chapter 2 : Ethereum in focus
Contrary to these market dynamics , net inflows to crypto ETPs still remain positive YTD as evidenced in Chart 2 , outlining the YTD net inflows of $ 296m , as at 23 August . A key conclusion , looking at the net positive inflows into the ETPs , is that demand for crypto-based products such as ETPs is actually increasing .
There are several factors attributing to the continued appetite for crypto ETPs as reflected in the AUM growth , as outlined in Chart 2 . A key benefit of trading crypto ETPs is they are a gateway for institutional investors to gain exposure to the underlying product without having to deal with custodial and regulatory issues of having the underlying spot products on their balance sheet . Moreover , buying and selling of crypto ETPs are executed in the same manner as their equity or fixed income counterparts , many being traded via regulated exchanges , and platforms such as Tradeweb and Bloomberg RFQe . The products also settle in the same manner via
Chart 1 : MVIS Crypto Compare Digital Assets 100 index is down 56.9 % as of 23 August
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Source : Bloomberg
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