The merger will bring together Ethereum as a Bitcoin halving: Arthur Hayes

In his latest blog post, former BitMEX CEO Arthur Hayes broke down how he expects Ethereum traders to react before and after the merger.

Based on the technicals of the upgrade, he suspects that Ethereum will rally after a successful transition in September, similar to how Bitcoin rallies during its periodic halving cycles.

The theory of reflexivity

In an article entitled “ETH flexible,” Hayes centers his bullish thesis around George Soros’ “theory of reflexivity.” The theory suggests that there is a feedback loop between market prices and the expectations market participants have of a given market situation.

In the context of the merger, Hayes believes that this phenomenon could increase Ethereum’s price due to the reflexive relationship between its price and its deflationary properties.

“If the merger is successful… traders will buy ETH today, knowing that the higher the price goes, the more the network will be used and the more deflationary it will become, driving the price higher, making the network more used , and so on and so forth,” he explained. “This is a virtuous cycle for bulls.”

The merger will usher in two major changes for Ethereum: it will move its consensus mechanism from proof-of-work to proof-of-stake, and also reduce ETH’s supply issuance rate by about 90%. This has led some to call the event the “triple halving”.

Combined with EIP-1559 – which burns ETH out of circulation with every transaction – ETH is expected by many to become a net deflationary currency after the upgrade. Therefore, Hayes suspects that a feedback loop may form between ETH’s price rise, usage and deflationary issuance.

Alternatively, the co-founder noted that this feedback loop could work against ETH, pushing its price down in the event of a failed merger. However, a look at ETH’s spot market activity, which has outperformed Bitcoin in recent weeks, suggests that market participants are anticipating a successful merger event.

Not selling the news

Ethereum derivatives data from Glass node last week suggested that traders may be planning to “sell the news” when the merger actually takes place mid September.

Specifically, the futures structure for Ethereum trades in backwardation leading all the way to June 2023. This means that futures traders expect ETH’s price to fall by the expiration date of their contracts.

However, Hayes offered two alternative theories as to why ETH may experience buying pressure in the spot market, and selling pressure in the futures market.

On the one hand, traders can hedge their long physical ETH bets in the futures markets in the event of a failed merger. On the other hand, they can hedge against their ETH position for general reasons, while collecting spot ETH just to pick up free chain-shared tokens after a speculative POW fork.

Hayes expects that these traders will “buy back the hedge” after a successful merger, and that anyone trying to sell their spot ETH will be in the minority. If there is indeed a sell at that point, Hayes only plans to increase, rather than decrease, his position.

“I expect we will see it play out in a similar fashion to Bitcoin halvings,” he wrote. “We all know the dates they will take place, and yet Bitcoin always rallies after halving.”