Despite the strength of other cryptocurrencies such as Solana (SOL) and Cardano (ADA), the price of Ethereum (ETH) fell below $2,500.
On December 22, Ram Ahluwalia, CEO of Lumida Wealth, offered a theory as to why the price of ETH is likely to recover and reverse its losses against I did.
ETHE discount ends quickly
To explain, the CEO pointed Here is a chart of ETHE that has consistently closed at a discount over the past few trading months. Ahluwalia observed a 4% rise on December 22, further reducing the discount.
According to the CEO’s analysis, this development means that most institutional investors who chose to purchase Grayscale’s regulated ETHE products to gain regulated exposure to ETH will now choose to purchase ETH in the spot market rather than through derivatives. It suggests that there is. product.
Ahluwalia added that this shift from ETHE to ETH spot can be explained by the “cheapest to deliver” contract theory. In the derivatives market, this theory states that derivatives like ETHE are the cheapest way for institutional investors to gain exposure to the underlying asset (in this case, ETH).
This is because the derivative in question, ETHE, is a futures contract that tracks the price of ETH through a regulated exchange (in this case, CME).
Will capital flows discover Ethereum and push ETH to $3,500?
So, based on this theory, the CEO went on to say that as the ETHE discount ends, marginal flows will likely move into ETH spot to secure staking yields. For this reason, institutions are unlikely to invest more funds in ETHE because “big gains” have been made.
As a proof-of-stake (POS) project, users can stake ETH to keep the network secure, and as a reward, Ethereum distributes a yield of approximately 4.3% to validators. These operators must lock up at least 32 ETH to validate a block of transactions and receive a block fee. They also earn money because they have to stake.
According to , there are over 28.6 million ETH staked as of December 22, with a reward rate or yield of 4.32%. Staking Rewards. Considering the correlation between staking amount and returns, the more users choose to stake physical ETH, the lower the reward rate, i.e. returns.
This dynamic will now come into play as the ETHE discount ends and institutions or large players can circulate funds into ETH through the spot market, driving up the price.
Looking at the ETH price action on the daily chart, buyers have the upper hand. However, a comprehensive close above $2,400 could push ETH higher to $2,500 and later to $2,500 in a buying trend continuation pattern.
Featured image from Canva, chart from TradingView