Ethereum Merger Tests Crypto Traders’ Nerves

“The cross rate between Ethereum and bitcoin has moved significantly in recent months,” Galvin said. “Our view is that it is the strong narrative surrounding the merger that has seen increased inflows into Ethereum, at the expense of bitcoin.”

Ethereum was around 0.049 of bitcoin’s price in mid-June. Today, it has risen to 0.079 as bitcoin has fallen to $19,500, Galvin said.

The crypto evangelist also believes rising interest rate expectations are a headwind for bitcoin and the cryptocurrency market as a whole, saying this is the most correlated he has seen the asset class with macro trends in the five years the fund has been running.

“We see an abnormally high correlation with macro events,” he said. “If you look back at CPI announcements, etc… the things that have shocked the Nasdaq in either direction have typically affected crypto in recent months.”

The merger

Meltdowns such as the Terra ecosystem and hedge fund Three Arrows Capital have also hit investor sentiment, along with the market losing more than half of its value since November.

Renewed interest in Ethereum comes as the team behind the $200 billion cryptocurrency sets a date for the long-awaited “merger,” which will allow holders of its native crypto token to earn returns to help validate the network.

The software upgrade represents a fundamental overhaul of how the Ethereum blockchain works, shifting from a “proof of work” to a “proof of stake” model, which is significantly more energy efficient.

By reducing the need for computing power, the upgrade is expected to cut Ethereum’s energy use by 99.95 percent.

Galvin said assets like himself would see two benefits from the migration: a reduction in price dilution and validation from transactions.

“About 4.93 million ethereum is issued to miners every year, or $8 billion, which means I’m actually getting diluted,” he said.

“You need $8 billion in new supply for the price to be neutral. Miners have high fixed costs, so they have to sell to pay these costs, which means there is selling pressure in the market, which has to be met with buying pressure. As “proof of stake”, the issuance falls around $5 billion to around $0.6 billion.

“The other difference is that instead of ethereum being issued to miners, they can be issued to me as a ‘staker’, meaning I can participate in the inflation.”

CoinSpot’s Ray Brown said users of the cryptocurrency exchange are “highly hopeful” that the merger will have a positive impact on prices, as traders are betting the upgrade will attract more developers and investors to the cryptocurrency.

“With the announcement of a hard rollout date just a week away, there is some expectation from Australian investors that prices could increase and stay strong,” he said.

“If the merger paves the way for a more efficient, cost-effective and decentralized method of issuing and executing smart contracts, investors and businesses will have a compelling reason to increase support for the Ethereum blockchain.”

There are many unknowns about the Ethereum merger, which is scheduled to take place between September 10 and 20, and some are comparing it to the Y2K scare. Coinbase Global, the largest US crypto exchange, will pause withdrawals and deposits of all Ethereum-based tokens “as a precaution”.

Galvin said there are risks when such a significant change is made, but he wasn’t concerned, adding the risks surrounding the upgrade mean the benefits haven’t been priced in.

“We have a lot of faith in the Ethereum development community and the program they’ve gone through to test it, but it’s not 100 percent certain,” he said.

“If things go well, you expect the reduction in risk to lead to potential price increases.”