BTC Halving: Sell-The-News or Buy-The-Alt-Rotation

recently, the price of Bitcoin soared above $70,000 for the first time ever, setting a new record; moreover, the U.S.-regulated Chicago Mercantile Exchange (CME) now boasts the highest open interest for Bitcoin futures contracts, surpassing that of Binance and other exchanges; lastly, the futures basis on CME reached an annualized rate of over 25%, which is almost five times greater than the U.S. risk-free rates.

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Where does that leave us today?

An significant event in Bitcoin’s fundamental structure continues to generate enthusiasm among traders and investors for potential price increases. Known as the Bitcoin halving, this event is anticipated to take place around April 20th. During this time, the number of new Bitcoins created per block will decrease from 6.25 to 3.125 coins.

Over the past few years when Bitcoin underwent a halving process, its average annual return from January to December was approximately 200%. This figure suggests that the Bitcoin price at the end of each year would have been around $91,500.

From a derivatives trader’s point of view, the predictability and assurance surrounding Bitcoin’s halving events are in comparison to the unpredictability of SEC decisions regarding spot ETFs and subsequent ETF approvals. Since traders are aware of halvings in advance, they aren’t taken aback by a known event. This insight provides an opportunity for traders to consider rotating their investments from Ethereum to Bitcoin post-halving.

When comparing Bitcoin and Ethereum options expiring on April 26 and June 28 respectively, it becomes apparent that the market’s expectations for price movements are reflected in both cryptocurrencies. For the April 26 options, Bitcoin call options are more expensive than their Ethereum counterparts, while Ethereum put options cost more than Bitcoin put options.

The current bitcoin halving event is influencing the pricing of short-term Bitcoin options, while pessimism surrounding Ethereum due to potential SEC regulations and an expected rejection of an Ethereum ETF in May is leading traders to buy Ethereum put options.

Examining the leading chart for Bitcoin derivatives, we observe that CME futures (represented by green) significantly ramped up in October, fueled by the excitement surrounding a potential spot ETF authorization. Currently, the open interest for CME’s Bitcoin futures surpasses any other exchange, including Binance, by a considerable margin.

The Ethereum open interest on CME remains stagnant with minimal growth, while Binance continues to significantly surpass it. This indicates that the US market has yet to accumulate Ethereum positions, suggesting that even if we consider the possibility of an Ethereum ETF launch in May or at a later date, there hasn’t been significant demand from buyers for Ethereum yet.

So why should we even care about this opportunity to buy the laggard Ethereum?

The Bitcoin market looks forward to the halving event that will decrease the production of new coins. This is evident in the options expiring on April 26, 2022. On the other hand, Ethereum’s supply has not been increasing since September 2022, and instead, it has been decreasing due to EIP-1559’s token burn mechanism.

Ethereum recently accomplished the Denver upgrade successfully. As layer 2 (L2) and layer 3 (L3) solutions come into play, they are enhancing the capabilities of Roll-up contracts, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), and even allowing for the creation of native “app-chains” for fast-paced protocols looking to insulate their activities in a separate ecosystem.

The future is uncertain, and investing involves risk. However, it can be helpful to consider whether the current market price accurately reflects the underlying fundamentals, or if there’s an untapped opportunity that the market hasn’t fully embraced yet.

After reducing our holdings of Bitcoin by half, I believe the significant events surrounding it will be in the past for me. Instead of simply reacting to new developments by selling, this time I plan on shifting some funds into Ethereum as an alternative investment choice.