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Two Ways to Arbitrage the Ethereum Merge!

Today, we discuss two simple ways that traders can adopt to take advantage of arbitrage opportunities for the upcoming Ethereum merge: carry trading and a simple stETH DeFi arbitrage trade.

Carry trading, or cash and carry arbitrage, is a market-neutral strategy that exploits inefficiencies in the spot and the futures market. It combines a long position in the spot market with a short position in futures when the market is in contango — a condition where the future prices of an underlying asset are higher than the current spot price.

Trade ETH on Huobi Futures

The idea is that the trader “carries” the asset until the futures expire. As expiration nears, the premium disappears; on the day of the settlement, the futures price converges with the spot market price, generating relatively riskless returns for the trader.

Carry traders make money no matter what, although the return depends on how steep the contango is. Bitcoin futures usually offer a substantially higher carry yield than their fiat currency counterparts, most of which yield less than 5%, according to a JPMorgan report published on April 7. Today, Bitcoin futures are priced at around US$23,335, while the price of Bitcoin hovers around US$20,000.

In such a situation, traders are expected to at least pocket the difference between the two prices.

But if the spot price rises above the futures price, the investor can profit further by selling the asset on the spot market and buying a futures contract — for example, a long position that cancels out the original short position.

In the context of the upcoming Ethereum merge, the market is bullish as Ethereum futures for September are priced much higher than current prices, meaning the market is in contango. All traders need to do is buy Ethereum and short Ethereum futures, in the belief that the final price will end up somewhere in the middle.

🟢Arbitrage — Betting Big on Ethereum 2.0 with stETH

And then there is DeFi arbitrage, of which there are many kinds. Let’s take a look at staked Ethereum, for example, which represents the value of Ethereum tokens that are staked in preparation for the upcoming merge. stETH trades at a discount to Ethereum because users’ Ethereum tokens are staked and locked up until the merge happens.

How does staked Ethereum actually work? Its issuer, Lido Finance, provides a staking service that lets users deposit Ethereum, receive the stETH in return, and earn a yield. Essentially, stETH acts as an IOU until after the merge occurs. Lido then takes those deposits and adds them to Ethereum’s Beacon Chain, which uses proof-of-stake rather than the original proof-of-work version of Ethereum.

And yet, stETH will be redeemable 1:1 for Ethereum after the merge occurs. A simple play would be to purchase stETH tokens, which trade at a discount to Ethereum, and redeem it 1:1 for Ethereum after the merge occurs.

🟢Interested in hearing about more trading ideas?

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