Institutions flock to ETH after Ethereum Blockchain’s Shanghai upgrade

Ethereum implemented the long-awaited Shapella hard fork, also known as the Shanghai upgrade, on April 12, reducing the risk of staking the blockchain’s native token, ether (ETH), by allowing withdrawals of locked coins at will. The pivotal event has galvanized institutional interest in the second-largest cryptocurrency by market capitalization.

Since April 10, the number of active, or open, ether futures contracts traded on the Chicago Mercantile Exchange (CME) has risen 39% to 6,248, according to official data. In US dollar terms, open interest increased by over 70% to $633 million. The figure hit a 12-month high of $675 million on Friday, data from Coinglass shows. Each contract has a value of 50 ETH and is quoted in US dollars per 1 Ether.

Institutions typically prefer regulated products such as CME futures that allow them to take exposure to digital assets without owning them. As such, CME futures tied to ether and bitcoin are considered a proxy for institutional activity.

“CME’s market share has grown as institutions have been forced to evaluate the credit exposure underlying their collateral on cryptonative exchanges,” said Jeff Anderson, a crypto trader and former CIO of Folkvang Trading. “Activity around Shapella has revealed this with open interest at 12-month highs.”

Noelle Acheson, the author of the popular newsletter Crypto is Macro Now, expressed a similar opinion.

“The past few days have seen a strong influx of institutional interest in ETH futures,” Acheson said. “USD open interest is now at its highest since March 2022, and just before the weekend ETH futures open interest on the CME jumped over 80% in USD,” Acheson said.

An increase in open interest along with a rise in price represents an influx of new money into the market and confirms the uptrend. Ether’s price has risen 8% since the Shapella hard fork, CoinDesk data shows.

“ETH is definitely experiencing idiosyncratic flows at the moment,” said Vetle Lunde, senior analyst at K33 Research. “BTC OI is down 1.5% since April 10, while ETH OI is up 38.7% over the same period,” referring to open interest.

“We have seen similar flows in exchange-traded products (ETPs). BTC ETPs saw net outflows of 1.52% from April 10 to April 18, while ETH has seen net inflows of 0.77% over the same period,” added Lunde to.

The futures basis, or the spread between prices in the futures and spot markets, has widened, with the annual rolling three-month premium doubling to over 4%. The combination of growing open interest and expanding base suggests the leverage is allocated to the positive side.

A rising premium often attracts carry traders to the market. Carry trading involves setting up a market-neutral strategy by selling futures and simultaneously buying the underlying asset in the spot market to set the price difference between the two markets.

“The attractive fundamentals have brought more traders to the market,” Anderson said.

Activity on other exchanges has also picked up after Shapella, which suggests that institutions are not the only ones flocking to the market right now.

“Open interest has also hit record highs on Deribit, so it may not be conclusive evidence of institutional buying,” said Dick Lo, founder and CEO of quant-driven trading firm TDX Strategies.

Global open interest for ETH futures, excluding CME, has increased by nearly 22% to $6.62 billion, data from Coinglass shows. Open interest in Deribit-listed ETH futures has increased by 30% to $750 million, reaching the highest since the May 2021 record high of $778.6 million.

“After the Shapella upgrade, volatile withdrawals have been orderly and well absorbed by the market, and we are also seeing an increase in stakes from ETH holders. As ETH continues to be deflationary post-merger and with the added attraction of stake returns that can be freely played out, we see more bullish interest in ETH,” Lo said.