Merge Week Is Finally Here

SEP 12, 2022 • 4 Min Read

Andrew Krohn

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🌅 Welcome!

Today, Starbucks announced they will introduce Polygon-based NFTs to their loyalty program. Monday mornings just became something to look forward to.

The Merge is projected to be less than 3 days away, ETH open interest is far out-pacing BTC, Saylor continues his digital gold accumulation, and our Research team explores the relationship between stablecoins and market prices.

This is the Delphi Daily. Let’s dive in.


🚨 In Case You Missed It

  • Starbucks will offer an NFT-based loyalty program on Polygon. Users can earn or buy NFTs that offer benefits.
  • CME Group launches ETH-based options, three days before the Merge.
  • MicroStrategy plans to sell up to $500m in Class A shares to buy more BTC. Elsewhere, BTC hashrate just hit an all-time high.
  • Algorand Foundation says it deposited 35m USDC on Hodlnaut before the platform suspended withdrawals.

📊 ETH Open Interest Reaches Largest Divergence From BTC

  • On September 8th, the notional open interest of ETH-based options marked the largest positive divergence compared to BTC options ever, at a ratio of 1.74. Historically, ETH options have averaged a ratio of 0.54 compared to BTC options.
  • On this date, the total open interest in ETH options totaled 7.54k (in $m) compared to 4.3k for BTC options. With the Merge now less than 3 days away, speculators continue piling into ETH options (vs BTC options) at historic levels.
  • Prior to the July 2022 announcement indicating timelines for the Merge, the aggregated open interest in ETH options had never surpassed that for BTC options.  Since then, the ETH/BTC open interest ratio has increased by 300%, showcasing the intense appetite for ETH exposure leading into the Merge.
  • The upgrade is expected to occur on September 15th, triggered at block #15540293. Will the Merge be yet another sell-the-news event or will the changes to ETH issuance rate and tokenomics prove strong enough to keep the party going?
  • For more on the market updates, Delphi members can read our Delphi Pro report here.

⚡ Wake Me Up When September Ends

  • One topic that has garnered much discussion is the idea behind a USD Liquidity Index. The thesis is that the quantity of money (dollar liquidity) holds a greater influence over risk appetite compared to the price of money. Simply put, when liquidity is bountiful, so is risk tolerance. When liquidity dries up, so does risk.
  • One measure of dollar liquidity accounts for three metrics from the Fed’s balance sheet: Fed’s total assets, the size of the Reverse Repo facility, and the US Treasury’s general account balance.
  • This index is showcased in the chart above. When you plot it against SPX over the past two years, the relationship is striking. It’s clear the two have a strong symbiotic relationship and have maintained a 93% correlation for the last two years.

  • As we continue to beat a dead horse over the impact that global liquidity has on markets, an interesting thought experiment comes to mind. Are there any crypto-specific liquidity indicators that can act as a proxy to the USD index?
  • Of course, stablecoin issuance and USD liquidity are two completely different beasts, but we can draw a parallel to the change in stablecoin supply versus total crypto market cap.
  • Over the past 6 months, the variation in total stablecoin supply (on ETH) has entwined itself with the price action of the total crypto market cap. Interestingly, this relationship exhibits the same correlation of 93%. However, if we broaden the time horizon to 24 months, the correlation sinks to 67%.
  • It is possible that the rapid expansion of the stablecoin market over the past several years (from $2b to over $100b) has muddied this relationship. In turn, a tighter correlation between the two may be experienced moving forward.
  • For more on this, Delphi members can read our latest Market Insights report here.

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