Gamma Squeeze? Ethereum Outperforms Crypto Market With 50% Rally

Ethereum ETH/USD extended a week-long rally that has seen its price appreciate over 50%, as per data from Benzinga Pro.

What Happened: ETH surged 8% from $1,476 to an intra-day high of $1,595 during Asian hours on Friday. The second largest cryptocurrency was up 6.31% against Bitcoin BTC/USD and 5% against Dogecoin DOGE/USD.

Earlier this week, ETH saw a 50% five-day rally to a high of $1,620 on July 20. The price of BTC rose just 10% by comparison.

On Thursday, analysts at Deribit said that “the skyrocketing price of ETH seems to be caused by a gamma squeeze.”

At the time, they found that the available data suggested that the price increase still lacks “sufficient support.”

“The short sides on derivatives groan: more than $600 million in Delta 1 contract shorts were liquidated, while Ribbon Finance, one of the well-known sellers in the OTC crypto options market, added an at-risk position in ETH options with a notional value of $57 million overnight,” said the analysts.

In order for a gamma squeeze to take effect, the overall crypto market has to continue to be bearish, with bullish sentiment around the asset in question. The underlying asset – in this case, ETH – generally should have poor liquidity and a relatively complete derivatives market.

Following news around the ETH Merge, block traders acquired many short-term ETH out-of-the-money (OTM) options that expired in the current week and the following week, noted Deribit.

Market makers bought spot/long perpetual contracts to hedge risk when selling call options, but this translated to massive buys given the smaller market size and drove prices higher. As such, some options went from OTM to in-the-money.

“Market makers had no choice but to buy again; as a result, the price of ETH began to skyrocket.”

Retail traders have now jumped in on this price movement, adding further pressure on market makers and option sellers to buy more.

 “As a result, ETH’s gamma exposure has reached a new historical record high,” stated Deribit.