Ethereum broke the $3,000 mark early Thursday, a major milestone due in part to hedging activity by market makers in the ETH options market.
This view comes from Griffin Ardern, head of options trading and research at cryptocurrency finance platform BloFin.
According to Ardern, market makers, who are responsible for providing liquidity to order books, have recently sold a lot of call or bullish positions at $3,000. This exposed them to a risk called negative gamma. As ETH approached this level, market makers purchased Ethereum on the spot and futures markets to hedge against potential upside risks and maintain a neutral overall market risk.
According to the analyst, this hedging activity contributed to the bullish momentum, pushing ETH to surpass the $3,000 mark.
Interestingly, a similar pattern was observed in the Bitcoin market in November, with price increases rising above $36,000.
Market makers, the entities tasked with providing liquidity to order books, are always on the opposite side of clients' transactions. They constantly buy and sell the asset they are interested in to keep a ledger independent of the market.
Ardern said the following regarding the issue in her statement:
“The bulk of the negative market making is concentrated around $3,000, so market makers need to hedge risk there. Negative gamma means the market maker is making a lot of trades at the $3k strike price. “To manage this, market makers need to trade in the direction of price movement, buying ETH as prices rise.”
In mid-2023, market makers on both the BTC and ETH options markets had a positive gamma exposure and were constantly trading against the price direction, capping out price volatility.
*This is not investment advice.
