Forget Bitcoin. Interest in Ether is booming ahead of the merger.

The merger is set to fundamentally change how Ethereum works as it ditches the “proof-of-work” system that underpins the security and operations of Bitcoin in favor of a “proof-of-stake” system. The move will make Ether mining redundant, reduce the network’s carbon footprint and reduce the supply of tokens in circulation.

Both changes are expected to increase prices. Most crypto traders bet on it.

From June to August, Ether outperformed almost every top-ranked digital asset by “a long shot,” a sign of intense interest in the run-up to the merger, according to Clara Medalie, director of research at crypto data firm Kaiko. While gains have faded since an August selloff gripped the stock and crypto markets — the two are correlated given their sensitivity to changes in investors’ appetite for risk — Ether is still up more than 50% since mid-July.

Bitcoin has been left in the dust. By almost any metric, investor attention now favors its smaller peer.

None of the Bitcoin products covered in the latest monthly digital asset management report from data firm CryptoCompare posted gains in assets under management or volume in August. Instead, Ethereum-based products dominated the growth. And for the first time since December

Grayscale Bitcoin Trust

lost its position as the most traded crypto trust product; the top spot went to

Grayscale Ethereum Trust
.

This change in investor interest – and fund flows, with the average weekly inflow for Ether products at a record high in August – is beginning to be evident in key measures of market sentiment and asset performance.

The Ether-Bitcoin ratio, which measures the performance of Ethereum’s token against the largest digital asset, rose at the fastest rate ever from June to July, according to Medalie. Also, the spread in 30-day volatility for Bitcoin and Ether has widened to its highest level in more than a year, suggesting a stark difference in market activity between the two assets, reflected in booming trading volume, Medalie said.

“Derivatives markets have also played a central role in Ether market activity,” says Medalie. “Perpetual futures open-interest denominated Ether recently broke all-time highs, suggesting traders are placing their bets ahead of the merger.” Open interest refers to the total amount of open derivative contracts.

A large majority of all digital asset trading takes place in the crypto derivatives market, where the likes of perpetual futures or “perps” rule the roost and play a key role in both larger market price discovery as well as hedging. In addition, leverage – borrowed money – is widely available to derivatives traders.

So, as more money pours into the Ether derivatives market, price volatility is likely to worsen as traders shift bets and take new positions over the coming days as the success and popularity of the merger becomes more apparent.

“Number of futures positions [denominated in Ether] open at this point represents a staggering all-time high, and acts as a massive leveraging force on the price action of Ether over the next few weeks,” Conor Ryder, analyst at Medalie’s Kaiko team, said in a note.

And it’s not just day traders or crypto fanatics who participate. The biggest holders of Ether, so-called whales, are also in on the action. The top whale addresses have moved a significant amount of Ether to exchanges, according to analysts at crypto exchange Bitfinex, with holdings at non-exchange addresses down 11% over the past three months. Moving crypto out of a private wallet and into an exchange is an important precursor to trading.

So where does the feeling stand now, less than a week before the merger is due to start?

Perhaps the best indicator is in the Ether options market, according to analysis by Kaiko, which is currently showing what may be “the most obvious case of hedging that the crypto options markets have seen.”

The market for Ether options expiring before the merger is almost evenly split between calls – bets that prices will rise – and puts, which are bets that prices will fall. But that all changes for options expiring after the merger, with 79% of all options expiring after the network upgrade being calls. This is a bullish sign.

“Investors are bullish on the long-term future of Ethereum, as evidenced by the options markets, but remain anxious in the short term about the possibility of a self-inflicted crisis,” noted Kaiko’s Ryder, citing a build-up of short positions in Ether. futures, which, like put options, likely denote traders hedging their bets.

“The merge is one of the only events in crypto lately that hasn’t been macro-driven,” Ryder said. “It will be interesting to see if that triggers a breakout towards a lower correlation with the stock market, for better or for worse.”

Write to Jack Denton at [email protected]