Introduction
Yes, it’s finally happening: Despite years of delays and memes like the one below becoming routine, Ethereum is approaching a critical milestone: The Merge! In this article, we’ll shed light on this crucial event and what Ethereum’s transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) means for ETH and the broader crypto space.
Only a Few Weeks Until the Merge?
Yes, we have been talking about the Merge for quite a while on this channel – but expectations of an imminent launch have been pushed out time after time again. Is this time different? It certainly seems so since tomorrow the last testnet Merge is scheduled to occur before the real Merge comes next.
If you need a reminder of what the Merge is, check out this great summary by Bankless.
The Bull Case
If you checked Crypto Twitter recently, you probably didn’t miss the bullish hopium spread by ETH supporters on a daily basis. In short, this meme does a good job summarizing the current sentiment:
To further promote the bull case for ETH, let’s give the word to a few of Ethereum’s biggest advocates (or “ETH maxis” in other words 😉):
Jokes aside, it’s undoubtedly true that many people still have no idea what the Merge is and what a dramatic impact it will likely have on ETH as an asset.
While not anyone in the crypto community might agree, the fact that Ethereum will transition to a much more energy-efficient consensus mechanism will significantly impact Ethereum’s public perception as an “ESG-compliant” asset – which could prove to be an advantage over BTC when it comes to regulation and institutional investing.
Besides the energy efficiency narrative, Ethereum believers often connect the Merge with a concept called the “Triple Halvening.” Sounds bullish, right? Read the thread below to get an in-depth explanation of what the “Triple Halvening” is and how it might affect the ETH price after the Merge.
The Bear Case
While the Merge is a critical milestone for Ethereum and the broader crypto space, it will NOT offer a solution to all of Ethereum’s problems – notably the scaling issues plaguing the L1 blockchain. The Merge “only” marks the transition of Ethereum’s consensus mechanism from PoW to PoS.
Besides the fact that the Merge could go wrong (compare it to a space shuttle having its engines replaced mid-air), there are other significant risk factors – mostly of economic and systemic nature. Bankless does a great job summarizing these risks, and the potential chaos around the ETH Merge in their latest newsletter. The tldr is:
During the Merge, the Ethereum blockchain will be “hard forked” into two chains: the PoW and the PoS chain. Initially, this can potentially lead to quite a bit of chaos in DeFi land since stablecoins and liquid staking tokens (stETH, rETH, etc.) will fall to 0 on the PoW chain (they can’t be redeemed anymore). This will lead to a potentially considerable amount of volatility, liquidity movement, and MEV (Minter Extractable Value). Read more in this article to find out more about the potential chaos surrounding the Merge.
It’s important to remember that the Merge has a drastic impact on a key player in the Ethereum ecosystem: miners. Overnight their business model will drastically change…
How to Position Around the Merge
Has the Merge been priced in by the recent pump, or is there more juice in the tank? Clearly, ETH has outperformed BTC in recent weeks…
Who knows what the short term will bring, but what is clear is that traders are making big bets right now. If you want to gamble on a short-term pump (or dump after the Merge), be careful not to burn your hands… Avoid leverage and for a more hands-off approach, accumulate ETH during dips and hold it for the long term. If the Merge goes as planned, it should certainly have a BIG impact on Ethereum’s tokenomics and positively influence the ETH price in the long run.
A possible short-term scenario could be: Run up until a few days/weeks before the Merge, then profit taking and derisking. If the Merge goes through smoothly, there could be more bullish price action (similar to BTC’s halvings which mostly show their bullish tokenomics effect after the fact).
Many traders fear the Merge as a “sell the news” event. While this might certainly hold true, the FUD that ETH stakers will dump all their ETH right after the Merge is undoubtedly not factual. In fact, staked ETH will not be unlocked until at least 6-12 months after the Merge – and even then, a sudden drop is unlikely due to an unstaking queue.
Have been and will there be other ways to “play the Merge” besides holding ETH? Indeed – in recent weeks, tokens related to the Ethereum ecosystem benefitted from the broader market bounce remarkably.
However, if you want to trade altcoins right now, be aware that this small wave of bullishness could end as quickly as it began as we find ourselves in the possible later innings of a macro bear market rally. And no, the Merge will not be enough of a bullish catalyst to withstand a potentially broader market crash…
Great piece Elliot!
In the latest edition of the HXLLYWXXDVICES monthly editorial, the publisher argues now is the time we “witness and allow.”
He does so via a couture model in Louboutins and a dead classical poet floats on down a French river?
Link to the August edition:
https://hxllywxxdvices.substack.com/p/hxllywxxdvices?s=r&utm_campaign=post&utm_medium=web&utm_source=direct