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After a brief mid-August rally, Bitcoin’s price has revisited June’s less exciting sideways maintenance within $20k. Meanwhile, inflows into short-Bitcoin investment products jumped to a record $18 million last week, rising to a total of $158 million AuM. Does this indicate a shift in digital asset bets as Ethereum’s Merge approaches?

Short-Bitcoin: A Bearish Momentum?

Even in bear markets, investors try to profit by making the right bets. If they speculate that an asset’s price will decline, they can short-sell it. In the case of Bitcoin, this can be done without directly trading on-chain too, with the help of derivative funds that provide BTC price exposure.

From mid-August to September, Bitcoin shorting has increased by 70% on one of the largest short Bitcoin ETFs, BITI from ProShares.

(Click on image to enlarge)

Hawkish Fed is causing more Bitcoin shorting this year than ever. Image credit: Arcane Research

As per the latest CoinShares report on digital asset fund allocation, Bitcoin outflows continued the 4th-week negative streak, at $11.1 million. At the same time, short-Bitcoin investment funds increased inflows to a record $18 million over the last week, which is a new $158 million AuM record. 

Despite the Ethereum’s Merge hype, it also saw a net negative flow, at $2.1 million outflows. In contrast, Ethereum’s competitors, Solana and Avalanche, had increased inflows, totaling at $0.5 million. The geographical distribution of investment flows is revealing. While Brazil, Germany, and Canada had $9.5 million in inflows combined, the US had only $0.8 million.

As noted previously, this is the result of Powell’s Jackson Hole speech. The Fed Chair made it clear that the Federal Reserve will not stop interest rate hikes until the 2% target inflation rate is reached. In a macroeconomic environment of monetary tightening, risk-on assets like cryptocurrencies usually fare poorly.

Bitcoin Dominance and Ethereum’s Merge: Flippening Not Likely

If we exclude centralized stablecoins and VC-funded ICO projects, we arrive at the real Bitcoin dominance index. It shows Bitcoin’s market cap share (dominance), at 63.29%. This level is getting closer to the two-year record low in May 2021, during the altcoin bull run. 

If all cryptocurrencies are included, Ethereum’s dominance is at 20.3%, while Bitcoin’s dominance is at 39.5%. This 2x market cap difference tells us that Ethereum flippening, as market cap dominance reversal in favor of ETH, is highly unlikely.

At present Bitcoin’s price range of ~$20k, Ethereum would need to rise just above $3,120 per ETH for the flippening to happen, a 95% increase from the present ETH price of ~$1,593. An additional hurdle is that Ethereum doesn’t have a set maximum supply cap like Bitcoin. While the EIP-1559 burning mechanic counters Ethereum’s inflation rate, it would still have continuous inflationary pressure. 

To counter it fully and spike demand, ETH utility would have to drastically increase as well. In turn, ETH gas fees would have to go permanently under $0.5. While this would likely spark mass adoption, Ethereum’s main chain scaling is yet to happen in the Surge upgrade that introduces sharding, scheduled for late 2023. 

Furthermore, despite having four times fewer daily transactions than Ethereum, Bitcoin has two times more active addresses.

ETH vs. BTC 7DMA active addresses, source: glassnode, image credit: The Block

With that said, Ethereum did flip Bitcoin in the Deribit options market for the first time ever in August, at $5.7b vs. $4.35b in favor of Ethereum. Excluding market upsets created by the Federal Reserve monetary, there is also the question of Ethereum’s decentralization once it becomes proof-of-stake. 

OFAC’s sanction of Tornado Cash open-source protocol opened this Pandora’s box for the entire Ethereum ecosystem. Some of Ethereum’s own developers have stated that they will leave Ethereum if such censorship is allowed.

”If we allow censorship of user transactions on the network, then we basically failed”.

Marius Van Der Wijden, Ethereum developer

Nonetheless, it remains uncertain if such transaction censorship concerns would have any impact on Ethereum’s wider adoption. After all, investors typically follow the road of least resistance.

More By This Author:

How The Merge Will Change Ether’s Supply-Demand Dynamics As Miners Get Phased Out
Ethereum Gains Likely Overstated Ahead Of The Merge
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