This has been a brutal bear market so far and ETH has not been spared. However, recent optimism around the much anticipated merger has led to a bit of a relief rally. Is this the start of a recovery, or could it be nothing but a ruse to get you wrecked? That’s exactly what I’ll be exploring in my latest Ethereum update, so if you have been considering picking upsome ETH, then this is an article you absolutely cannot afford to miss. Moreover, you may use the Jet-Bot that is the #1 copy trading platform to copy trade crypto. Copy-Trading allows you to follow the Top-Trader deals and earn profits 24/7 without any efforts or issues for you. The average monthly profit is +21%/month. With a binance trading bots you may get a help and decide your options to start your crypto. Register now and get 3 days trial access.
It’s been over three months since my last Ethereum update, and a lot has happened since then. I mean, back then, ETH was trading above $3,200. I was at Bitcoin Miami around that time too, and the feeling in the crypto market was bullish. We had numerous factors coming together to create a shitstorm the likes of which the crypto trading market hadn’t seen before.
Firstly, the global macroeconomic picture took a dramatic turn for the worse. The Fed started to jack up those interest rates and down came the valuations of nearly all risk assets. Of course, cryptocurrency is one of the riskiest assets in that risk bucket and was thus highly vulnerable to this liquidity extraction. But it’s the crypto-specific factors which appear to have really impacted all cryptocurrencies, including the first after the Terra implosion reverberated across the crypto space. That’s because those who were burned by the collapse had to sell off their good assets to make up for the losses they had incurred on Terra and U.S. currency in the immediate aftermath. Things appeared to somewhat stabilize, but any reprieve was short-lived as the broader impact of this disaster only started to play out a few weeks after the event.
Perhaps one of the most relevant to ETH was the de-pegging of Lido Finance’s stETH, which had many stakers concerned. I’ll add though that this wasn’t technically a de-pegging. Even though stETH was not really comparable to UST, the emerging disparity between ETH and stETH was enough to spook the market. Some of the largest institutional investors in stETH, such as Alameda Research, Three Arrows Capital, and Celsius, liquidated their positions. Of course, we know exactly what happened to those latter two. A massive liquidity crunch in the crypto space led to people selling good assets like ETH and BTC in order to meet their margin obligations. Leverage played a massive factor, as it always does, and some people were forced to part with their crypto, i.e., they were liquidated.
On top of all this, the macro picture continued to deteriorate as inflation kept climbing. As a result, the Fed was forced to increase the size of the rate rises. That’s the backdrop to the collapse we’ve seen in the price of ETH. I will add that most of these issues, despite the fuss around stETH, were related to broader market conditions and nothing ETH-specific, but there is one ETH-specific thing that we all have our eyes on and that is, of course, the merge.
ETH Merge Update
Ah yes, the merge. Such stuff as memes are made on:
The continual delays to Ethereum’s move to proof of stake have left many disillusioned and frustrated. However, despite the gloomy market sentiment and the disparagement, Ethereum devs are still beavering away at an even more frenetic pace, and they are getting close.
At the time of my last Ethereum update, I talked about the numerous Ethereum test nets that had successfully completed the merge. These included the likes of Kinsugi last year and Kiln in March. Then, in early June, one of the oldest and most established test nets, Ropston, also successfully completed the merge. It was almost bug free. It was an exciting event for the Ethereum community and gave a renewed sense of optimism that we could see a merge by August. However, cold water was thrown on those hopes a few weeks later when the Ethereum developers took the decision to delay the difficulty bomb.
For those unfamiliar with the ‘difficulty bomb’, it is a hard-coded mechanism in Ethereum’s protocol that’s set to explode after a certain number of blocks are mined. When that happens, it swiftly increases the difficulty of the Ethereum network. Eventually, as this difficulty increases, the bomb makes it impossible to mine any more ETH. The main purpose of this bomb is to force Ethereum miners to switch away from the proof of work chain and move over to the proof of stake chain.
Anyhow, the ETH developers delayed the bomb because they didn’t want it to go off before they were confident that the merge would be successful. So with the grey glacier update, the DEVs pushed the bomb back to 15,050,000 block that is expected to be mined in September.
However, pushing the bomb back to that date was seen by the crypto community as a sign that they could not expect to see the merge in August. After all, this dulled enthusiasm at a time when the whole market wanted something to look forward to.
As a result of this news and the broader market mayhem, ETH’s price fell considerably in June. If you wanted a proxy for how likely the market thought the merger was, you could always look at the stETH to ETH ratio:
As you know, stETH is tokenized staked ETH and can be seen as a right to unstaked ETH coins. The price of stETH fell significantly more than that of regular ether as the market digested the news of the delay to the difficulty bomb. As I mentioned a bit earlier, there were other factors at play in the secondary market, but it’s a decent benchmark nonetheless.
Another place that you can look for market estimates of the merge date is on the polymarket decentralized prediction market. They have markets on when the ETH merge could actually happen, including before September, before October, November, etc. It’s pretty cool.
Anyways, as much as I wanted to see a merge in August, I understand where the devs are coming from. There are still two more test nets, Gurley and Sepolia, that have to complete the merge before it’s executed on the main net. I also think that the reaction to the difficulty bomb delay was a bit overblown. That’s because, according to Tim Baco, a senior ETH researcher, he was pretty confident that the merge would happen before the end of the year, short of multiple unforeseen bugs.
Last week we got our best indication of that yet. That’s because the ETH devs tentatively put a date on the calendar for the mainnet merge. That date is the 19th of September. While it isn’t final, it is the first time that the devs have ever felt comfortable putting an actual date on the event.
This news sparked renewed optimism in the Ethereum community, and ETH’s price reacted accordingly. It recovered by more than 30% in the days that followed. You can also see how the market digested the news with the stETH/ETH ratio over the past few days. It appears to have been closing the gap, i.e., traders are more bullish on the upcoming merge.
It’s not only the price, though, that seems to be flashing some bullish signals. You also had the news in one of Coinshare’s latest reports that institutional interest has turned positive. That’s because they’d seen significant fund flows into ethereum-based products for three consecutive weeks. At the end of the past week, we saw $7.6 million of inflows to ETH products while, at the same time, bitcoin-based products saw $1.7 million of outflows.
Of course, there are many who think this rally was nothing but a ruse, a fake out that risks bringing some people in on fomo. One of these skeptics was Peter Brandt, who is a pretty well-known trader. He claimed that the rally came on light volume, which means the thrust didn’t come from strong hands, so make of that what you will.
But short-term technicals aside, many people are bullish on the prospects of the post merge, and that comes down to a number of factors.
The first and perhaps most compelling argument for ETH post-merger is, of course, its tokenomics. I know that it’s an increasingly tired cliche, but post-merger ETH really could become ‘ultrasound money’. This is something we’ve been banging on about for over a year. Ever since the implementation of EIP 1559, the ETH burn has been a hot topic.
According to most calculations, post-merger ETH will become deflationary. You can even simulate the merge over here on ultrasound.money. We can see that supply growth will be -0.4% after the merger.
I know many of you are tired of this argument, but you really have to appreciate the long-term implications of a decreasing supply for the value of everything.
The case is strengthened by the fact that inflation in the United States is currently at 9.1%. That’s if you believe the official stats. There are very few monetary assets out there that are natively deflationary, so that’s the tokenomics argument.
Then you have to consider the fact that ETH will become a more attractive asset from an institutional investor perspective. Let me explain. Firstly, as the merge will be moving ETH to a proof-of-stake consensus mechanism, it will make ETH less energy-intensive to mine.
By some estimates, this could lead to an energy use reduction of 99.95%. What this means is that it will sidestep all of the regulations and negative press that proof-of-work cryptocurrencies, namely bitcoin, are getting. Now I know that these attacks on proof of work mining are dubious.
However, we cannot deny that this narrative exists and it has become the public narrative to such an extent that it’s keeping institutional investors at bay. We know they have these ESG mandates and they are excluding bitcoin on environmental grounds. Once Ethereum has transitioned to proof of stake, it eliminates that argument and makes ETH more attractive to these investors.
Then you also have the fact that once the merge has been successfully implemented, you will have a lot more certainty around the future of Ethereum. All those large and prudent investors who were worried about potential tail risks and issues around the merger are more likely to consider it. If they were going to start staking, there would also be more certainty around when they could withdraw their ETH. While we’re on the subject of withdrawing ETH, it’s important to clear up some misconceptions around stETH.
Contrary to popular opinion, once ETH has transitioned to proof of stake, stakers won’t be able to immediately withdraw their coins. They’ll have to wait for a separate upgrade that will come a few months after the merge. That was confirmed by senior devs like Tim Beiko, so that should assuage the fears of people who think we could see a massive dump of ETH come the merge.
You should also note that once the upgrade has been pushed to allow these withdrawals, users won’t be able to withdraw all at once. That’s because there’ll be a limit on the exit rate of the validators. This will be done in order to make sure that the change in the validator set isn’t too rapid.
So we’re unlikely to have a flood of withdrawals hitting the market, and that is if you even assume that more people will want to withdraw than we’ll want to stake. As I mentioned earlier, institutions and those who have been sitting on the sidelines may be lining up ready to stake, come the merge, you can’t say it will be a net withdrawal. Okay, so that’s the bull case, but what about the bear case?
Well, we have to start with another misconception around the merge, and that is that it could help the Ethereum network scale. This isn’t the case. It’s not a scaling upgrade but a consensus mechanism upgrade. The scaling benefits faster transactions. The lower fees are likely to only come once the sharding upgrades have been pushed through. This means that using Ethereum is likely to still result in the same issues around speed and gas fees that have some users tearing their hair out.
The wider Layer 1 landscape is also not without competition. Some really impressive smart contract chains, such as Avalanche, near Solana, Cardano, etc., are all working to lure frustrated Ethereum users to their networks. Even assuming that the merge goes off without a hitch, many Ethereum users could still become incredibly frustrated with the scaling issues.
This is especially the case given the misconception that the merge could be a panacea for all the issues Ethereum still faces, so there’s that. Then there’s the risk that the merge could be delayed again. Yes, the devs have placed a date in the diary, but they’ve also stressed that it’s not final. There are still two more test nets that have to complete the merge, and if there were to be a number of bugs discovered, then this could push the merge back yet again.
That’s perhaps of less concern than the chance of something going horribly wrong during the merge itself. While the devs are taking every step possible to test the merge before deploying it on the main net, there is always a risk that something unforeseen could happen. It’s hard to hedge this scenario, and if it does happen, it could have a cataclysmic impact on the whole crypto market. It’s not likely, but you can never ever say that something is guaranteed.
Finally, another argument for the bear case is just the broader macro environment. It is not likely to improve anytime soon, and risk assets like stocks and crypto are not going to recover until the Fed’s rate hiking cycle is complete.
Basically, the Fed is not slowing its rate hikes anytime soon, and after the July meeting, Fed officials are going away for a two-month holiday. It’s all right for some, isn’t it? That means that if inflation continues to climb at an entirely possible rate, then they will have to come back from their two-month recess and pump those rates even more. It doesn’t matter if you hold ETH, bitcoin, or stocks; in this macro environment, cash, sadly, seems to be king.
That’s time for some of my own thoughts on ETH and the merge. Now, I will categorically state that I am, of course, no financial advisor, so whatever I say now is my own opinion and I would encourage you to talk to your financial advisor before making any investment decisions.
That said, I think we are pretty likely to see an ETH merge this year. That’s based on the fact that the devs are comfortable enough to put it in the diary for September, even assuming there were one or two bugs. It was pushed back again. When the merger finally happens, the price of ETH is likely to rise. We can also see stETH approaching parity with ETH as investors arbitrage the difference when the unlocked stETH could be sold at a profit as ETH supply starts to decrease and holding demand equal to the natural supply and demand dynamics could be price accretive.
Of course, there may be a short-term retracement though as people sell the news on the event. They’ll be focusing their attention on the next upgrade which will allow the stETH to be withdrawn and the upgrade after that which will bring sharding to the network. Of course, this really depends on what happens in the macro environment over the next few months, which is still gloomy.
There are other risks that lie beneath the surface, but these are not Ethereum specific. I am holding ETH for the long term. I’m bullish on the technology and the transformative power of DeFi. The recent collapse of all those CeFi crypto firms further reinforces that belief. It’s that perspective that allows me to huddle for the long term.
When do you think we could see the merge? What other Layer 1 are you bullish on?
[This article is a transcription of a video made by Coin Bureau]
[Original video: https://youtu.be/Wp-4CSeroZ8]