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How will Ethereum trade around the Merge?

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By Matt Weller, Global Head of Research, City Index

For Ethereum enthusiasts, this week is somewhat like Christmas…if Christmas was promised to be six months away for years, prompting sceptics to question whether there would ever be a Christmas, and then it finally came on September 15, 2022.

Around 12:00 GMT or a little after on September 15, Ethereum will officially merge its legacy proof-of-work blockchain with the proof-of-stake Beacon Chain. Assuming “The Merge” goes smoothly, there will be a number of clear benefits for the world’s second most valuable crypto-asset.

The shift to proof-of-stake will reduce the Ethereum blockchain’s energy consumption by ~99.95%, removing one of the public’s biggest criticisms of proof-of-work blockchain technology.

The supply of ETH tokens may turn outright deflationary. The new security system will require far less issuance to maintain security, and combined with last year’s EIP-1559 upgrade that burns a portion of transaction fees, the annual net new issuance of ETH tokens will drop from the current 2.5% and may even decline.

To put it simply, this week may mark the largest supply of Ethereum we ever see, if The Merge goes smoothly. It sets the stage for future scaling upgrades. While The Merge itself isn’t expected to have a big impact on gas fees, transaction speeds, or network throughput, it is a necessary precursor to the Ethereum Foundation’s long-term plan to scale the network and make it cheaper/faster for the next generation of blockchain users and developers.

Ethereum Merge Sharding

How will Ethereum trade around The Merge?

It’s impossible to predict prices with certainty ahead of any event, much less the biggest fundamental change to an asset since its founding. That said, there is a compelling argument that we could see a “buy the rumour, sell the fact” reaction in ETH/USD around The Merge.

For one, prices have nearly doubled off their lows less than three months ago, with much of that rally attributed to traders anticipating a successful merge. In addition, there’s a direct mechanical reason that Ethereum will be less valuable after The Merge. In recent weeks, some Ethereum stakeholders have discussed maintaining the current proof-of-work version of Ethereum as an alternative platform for users and developers.

While most, including me, are sceptical that so-called ETHpow will be particularly valuable, traders who hold ETH before The Merge will automatically receive legacy ETHpow tokens that they can then sell. Current grey market valuations for the ETHpow network are at around 3% of the value of the main ETH network, so it wouldn’t be surprising to see ETH fall by ~3% immediately after even a successful Merge, akin to a stock going ex-dividend.

Looking at the chart (see below), ETH/USD has generally edged higher through the first half of the month, leaving the crypto-asset near the middle of its post-August range. The 200-day EMA sits just above the August highs around $2,000, and that will be the key resistance level to watch to shift the longer-term trend back in favour of the bulls. Meanwhile, downside support sits around $1,400 and should bring out buyers if we do see a “buy the rumour, sell the fact” reaction to The Merge.

Ethereum USD Daily Chart

Lowering the electric bill

Kevin Murcko, chief executive of Coinmetro thought that The Merge will be Ethereum’s most significant metamorphosis since it launched in the summer of 2015 and in so doing, will solve a number of headaches that have plagued the platform in recent years. Not least, reducing Ethereum’s electricity consumption by an estimated 10,000%, and going a long way to assuage the environmental criticisms levelled at the crypto industry.  .

Murcko said: “Rumours of Ethereum’s big merging event have turned into anticipation, leading to a monumental surge in the price of Ethereum-based tokens and coins. We are already seeing this play out with Ether which showed a slight decline to USD1,500 before recovering to USD1,750, higher than the USD1,600 it began the week at.”

The Coinmetro founder noted that the hashrate for Ethereum Classic rose by 500% year-on-year, reaching a new all-time high. But warned on the ‘buy the rumour, sell the fact’ sentiment, that he would not be surprised to see a price drop in the second half of September. “But that won’t stop retail investors, driven by FOMO, from filling their bags in the meantime.” In the long-term, he thought,  the merge will undoubtedly have a positive effect on Ethereum.

There are still a number of risks on the horizon, not least how exchanges will deal with the uncertainty surrounding the merge. Some may choose to temporarily pause activity related to Ethereum while tests are run, while others may face challenges in incorporating the new protocol. Any disruption is likely to be minimal, as it’s in everyone’s interest that the merge is successful. Either way September is set to become another milestone in the history of cryptocurrencies, and that means an enormous scope for investment returns.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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