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
Dec 31 Jan 15 Jan 31 Feb 14 Feb 28 Mar 15 Mar 31 Apr 15 Apr 30 2022
May 15 May 31 Jun 15 Jun 30 Jul 15 Jul 31 Aug 15
Source : Bloomberg