At long last, this is the summer of Ethereum. With the current downtrend in crypto, this might be a good time to buy some Ethereum if you believe cryptocurrency and blockchains will be a thing long term. The great upgrade called the merge is happening. Ethereum will be bigger, better, faster, and stronger. The merge is the second step in the ethereum roadmap. The merge converts Ethereum from proof of work to proof of stake, with Ethereum itself being used to secure transactions rather than a sick mining machine.
This will reduce the energy consumption of Ethereum by a supposed 90% and make the system more secure, but there are more benefits that users and the wider world can expect after the combined reduction in the amount of energy required for transaction validation.
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Long-term sustainability is a key reason for the merger. The changes that Ethereum’s developers make now will have long-term benefits and enable the team to move on to the next stages in their roadmap. The post-merge upgrades will not be possible without the merge. Macroinvestor Raoul Pal is excited about the merger and has shared some important information about the merger’s benefits:
‘I can’t express how important this ETH merge is. Let’s assume that it goes through fine. Let’s assume that it’s not a certainty, but assuming it does. I don’t think anybody understands in the crypto space what it means to have a benchmark yield. I’m going to use the expression again because people need to understand what I’m saying. In both cases, this will be a risk-free investment. I yield on free ETH. It is now programmed into ETH whether ETH rises or falls. That’s a different issue. That’s currency risk. But to have a benchmark yield in the largest second largest cryptocurrency when everybody wants to allocate over time to Web 3 as a theme that is not counter to the fud of the ESG narrative that Bitcoin has to battle with, it becomes incredibly attractive for institutions to allocate.
It also means that we can then price risk. As I said, emerging markets are all priced like treasuries plus 400 basis points, and junk bonds are quoted as spreads. I think everything’s going to give us a spread to ETH and I’ve looked at this as well. I’ve gone through something like Solana’s yields versus ETH staking yields. They’re basically volatility adjusted, so Solana is about 30% more volatile than ETH and its yields are about 30% more, so you’re kind of getting compensated for that, but it’s going to give us benchmark abilities to understand this and I think this is very important for the DeFi space and very important for institutional adoption.
One of the reasons gold was not adopted by institutions was because it had no yield and many of the pension funds needed to pay out pensioners needed a yield. And ETH is going to be a very robust yield whatever the price settles at. Call it between 5-8%, whatever the number is. It doesn’t really matter. That’s great, and it trades at a premium to treasury.
Now yes, you’ve got currency risk, which is ETH, but if you’ve made the one allocation, which is I want to get into Web3 or cryptocurrency, then ETH becomes an easy bet. So I think it’s a really big deal in ways that people don’t understand. Obviously, behind that is the amount that gets burnt, the supply issuance, et cetera. You’ve got an enormous supply shock. Everybody locks up the ETH. The available supply of ETH is reduced dramatically. You’ve got institutional demand, so you’ve got a supply and demand imbalance.
Does it cause problems with unlocks in two years’ time or a year’s time? You know, you suddenly get a whoosh when everybody gets unlocked. They can sell their ETH. Maybe it creates another dynamic in the market. We don’t know about it. Everyone’s trying to solve it with the stETH, which trades at a discount, obviously, because that’s liquidity. The discount is the difference in liquidity when people want liquidity. stETH will trade at a discount to ETH, which is how markets should trade, but a lot of people didn’t understand that either. They thought, well, they should be one for one. It’s like no, the only one for one in good times and bad times. It should trade at a discount because you need to pay a liquidity premium. I think it’s close to the absolute low. I kind of have a suspicion.’
Raoryul Pal also had something to say about the bottom of the crypto trading market after weeks of downward price action. The small increases we have seen in recent days are certainly a relief, but it’s much too early to talk about a bottom or any kind of recovery. For starters, the economic conditions that caused the drop have not yet passed. Prices can’t recover while the Fed is still hiking rates and the specter of recession hangs over investors.
In addition, the rumbling DeFi crisis is not over and we don’t know what shape increased crypto regulation will take. If the reason you are wondering whether bitcoin has bottomed out is that you want to buy the dip, there are a few things to consider.
Firstly, we believe it’s extremely unlikely to see a dramatic rally anytime soon, mostly because of the unstable financial conditions in every asset class currently and the fear and uncertainty of investors. We believe the best strategy to invest in is still the average monetary cost of an average. Dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis regardless of the share price. It’s a good way to develop a disciplined investing habit, be more efficient in how you invest, and potentially lower your stress level as well as your costs. Let’s hear what Raoul Pal has in mind regarding whether we have seen the crypto bottom:
‘I don’t know, but you can see how it’s copy trading crypto today. For example, today’s a pretty bad macro day. You know, the dollar is screaming higher and equities are going lower. Crypto’s up and it’s like huh. That’s interesting because it feels like those four selling participants are out of the market, as you say. So we’re definitely close to the low. We can see it from everything from on-chain data to, you know, technical analysis to logarithmic transit. I mean, everything is saying it’s here. I think we just need the macro turn before we can start to call that, but the leverage has gone and that’s a good thing now.
Let’s wait and see where the next leverage cycle will come from. My guess is that the capital providers to the space will end up being financial institutions, so I know that people like Apollo, Blackstone, you know, the investment banks, are all looking at how they can get involved because, I know, it’s not a popular thing to say in crypto, but those people understand risk and lending risk. So it becomes interesting.
There’s also another really interesting thing happening, which is this move towards, you know, assuming that it goes ahead towards the ETH merge, I think we’re going to end up creating a benchmark Web3 interest rate against which we can assess other risks. So that makes risk management slightly more transparent. You know, why are you giving me 10% interest when the ETH staking yield is 4.8%?
Therefore, you know, it’s ETH plus 400 basis points or whatever is okay. There’s a risk in that. I believe we’ll be moving in that direction as all capital markets have priced in treasury yields. I think it’s good because we need to grow up with some of this stuff.’
It’s almost impossible to know whether bitcoin has reached a bottom, but with so many uncertainties in the market, there’s a good chance prices will fall further. As a crypto investor, it’s important to take steps to minimize your risks and use dollar cost averaging to invest right now. It’s the wider economic situation that’s having the biggest impact on crypto prices, so watch for signs of improvement there. This may be the first downside and potential recovery for bitcoin and other crypto assets.
[This article is a transcription of a video made by Savvy Finance]
[Original video: https://youtu.be/qSTcQSdMFac]
