Many market participants believe that the highly anticipated Ethereum Merge will be beneficial to ETH. The inverse is more likely.
I don’t usually make predictions about asset prices in the short term. However, the financial markets will occasionally throw a big pitch.
Well-followed traders of digital assets, such as Arthur Hayes, Mark Cuban, and Travis Kling, have made very public statements (e.g., here and here) about how bullish the upcoming Ethereum Merge will be price of ETH.
I believe the inverse is more likely.
The most anticipated event in digital assets … ever
You’ve probably heard of the Ethereum Merge if you’re reading this article. It could be the best-forecast technical event in digital asset history (i.e., since the invention of Bitcoin). It is highly anticipated because:
- Ether is the second-largest digital asset as measured by network value.
- It is a major change to the network, with significant attendant execution risks.
- It has been delayed so many times that market participants have had years to analyze it.
People get excited about the prospects of these kinds of widely anticipated developments and believe they will lead to price increases. However, such occurrences are typically “sell the news” events.
Previous similar events include the introduction of bitcoin (BTC) futures on regulated US exchanges and the approval of the first bitcoin futures ETF (exchange-traded fund). Apart from the fact that these events marked long-term peaks in the dollar price of bitcoin and digital asset prices in general, they were also widely anticipated.
However, these watershed events in the evolution of the bitcoin market also represented changes in the market structure for the asset they represented. In the case of bitcoin futures and bitcoin futures ETFs, a new tool for selling bitcoin without purchasing the underlying spot asset was introduced.
The Ethereum Merge is a similar dynamic in that it alters the structure of digital asset markets. Read more; Right Ways to Get Started in Crypto for Beginners
Investors and speculators in digital assets (yes, most digital assets are pure speculation) can choose from a variety of consensus mechanisms. However, proof-of-work is by far the largest in terms of market capitalization (and, in my opinion, the most secure).
Proof-of-work now secures roughly three-quarters of all digital assets’ market capitalization, or network value. (While this asset value metric is imperfect, it should suffice for this analysis.)
However, if Ethereum adopts proof-of-stake, roughly one-fifth of the total network value of proof-of-work digital assets will be converted to proof-of-stake digital assets.
Don’t get me wrong – BTC and ether (ETH), Ethereum’s native token, are very different beasts. To me, ETH is not a replacement for BTC any more than Meta stock is a replacement for gold. They are both assets, but they are not the same.
However, it would be naive to believe that there isn’t a sizable contingent of participants in the digital asset markets who see some similarities between BTC and ETH that effectively make them partial substitutes in those investors’/speculators’ portfolios.
However, ETH’s similarity to (and substitutability for) BTC will be reduced, while its similarity to (and substitutability for) various major proof-of-stake assets such as Cardano, Solana, Tron, Avalanche, Algorand, and others will be increased. Read also; Advantages and Disadvantages of Investing in Crypto
As a result, the Merge will result in a decrease in the total supply of proof-of-work assets while increasing the supply of proof-of-stake assets. All else being equal, a decrease in the supply of proof-of-work assets implies an increase in the price of the remaining proof-of-work assets (primarily bitcoin), whereas an increase in the supply of proof-of-stake assets implies a decrease in the price of proof-of-stake assets. Ether will be the most valuable proof-of-stake asset based on current capitalization.
Heads you lose, tails you lose
The Merge can have two outcomes: it works or it doesn’t. If the Merge fails, it appears unlikely that the price of ether will rise. But even if it does work, the price of ETH is unlikely to rise because a proof-of-stake-based ETH will now compete for investor/speculator market share with a slew of other major proof-of-stake-based digital assets.
I have no idea whether the dollar price of ether will rise or fall between now and the Merge. And I have no idea whether the Merge will happen at all, given how long it has been delayed. But if I read the news one day and it says the Merge occurred, I expect that news to be marketable. Read more; What To Look For In A Crypto Exchange