A Research Firm Warns Clients Against Being Too Bullish on Ethereum, Suggesting a Short Position against its Native Token

Markus Thielen, the founder of 10x Research, has issued a warning to clients regarding their bullish expectations for ether (ETH), the native token of the Ethereum blockchain. According to his client note from Friday, Thielen recommends that investors hedge their long positions in bitcoin (BTC) by taking short positions in ETH.

This divergent advice comes despite a broader optimism among market analysts anticipating a significant year-end rally for ETH. However, Thielen’s model has consistently favored shorting ETH versus long BTC. As he notes in his client note:

"Our altcoin model continues to favor short ETH versus long BTC."

Thielen highlights several factors contributing to the potential weakness of ETH prices. Firstly, the outlook for the Digital Asset Treasury (DAT) appears weak due to reduced demand from retail buyers.

The Limited Capacity of Ether Buyers

Bitmine Immersion Technologies, one of the major ether buyers this year, has seen its issuance of new shares slow significantly since September. Retail demand has also sharply declined, limiting options for Bitmine to raise additional capital and purchase more ETH. Thielen believes that if Bitmine is unable to continue buying as usual, "so is Ethereum’s upside… at least for now."

Growing Downside Concerns

The anti-ETH bias in the Deribit-listed options market serves as another indicator of investor aversion towards ether. According to Thielen, traders are increasingly buying put options on ETH, signaling growing concerns over potential price weakness. In contrast, bitcoin’s options open interest has surged to a record high of over $50 billion, driven mainly by demand for upside exposure via calls.

Shrinking Pool of Incremental Buyers

Data from Google searches also indicates a diminishing pool of incremental ether buyers, making ether more vulnerable to price weaknesses, Thielen argued. This data points to a lack of new investors entering the market, reducing the potential for upward price movement due to increased demand.

A Breakout Scenario Suggests ETH Prices May Take a Hit

In case bitcoin breaks out of its multi-month sideways trading pattern above $100,000, ether may take an even greater hit. This scenario emphasizes the need for investors to hedge their positions using short ETH in favor of long BTC:

"A straightforward long-BTC/short-ETH positioning remains attractive in this environment and should continue to provide protection — even if Bitcoin ultimately breaks its triangle to the downside."

Market Performance

As of writing, ether has traded down over 3% in the last 24 hours at $3,815. However, it’s essential for investors to consider these factors carefully, especially given the potential breakout scenario.

Conclusion

In conclusion, Thielen’s recommendations suggest that investors should be cautious and potentially adjust their expectations regarding ETH prices. With a weak DAT outlook, reduced retail demand, growing downside concerns in the options market, and shrinking incremental buyer pools, ETH may struggle against increasing downward pressure as bitcoin breaks out of its trading pattern. As always, investors must weigh these recommendations and consider their risk tolerance to make informed decisions about their investments.