Eth2, or Ethereum 2.0, is a rollout that involves a transition from proof of work to proof-of stake. This will supposedly transform Ether into a deflationary asset as well as revolutionize the entire network. The Merge has been a hot topic for many years. However, anticipation has been growing for the event for the past few months. This week, Tim Beiko, Ethereum core developer, informed the world that it won’t happen in June but will likely be within the next few months. There is no firm date.
There are no new delays in Ethereum network upgrades. The immediate impact on Ether’s prices following the revelation is minimal.
Here are the views of several analysts on what the merger means to Ethereum and how it could impact the ETH price in the future.
Staking Rewards believes the Merge will be a short-term boon
According to data from Beaconscan there are currently over 10.9 million ETH staked onto the Beacon Chain. This offers a gross staking rewards of 4.8%. A recent report by Staking Rewards, a cryptocurrency data provider, states that this level of staking gives validators the chance to earn a net staking yield (or 10.8%).
The amount currently staked is approximately 9% of Ether’s circulating supply, but there are many barriers that prevent more widespread participation. These include the inability to withdraw staked Ether and any rewards from Beacon Chain.
Staking Rewards anticipates that the number of ETH staked will increase to 20-30 million ETH in the post-Merge era. This would yield a net validator (staking return), of 4.2% to 6%.
The Merge is a positive for Ethereum’s network. It reduces the circulating supply of ETH by burning and staking. However, there are still some concerns.
These include high transaction costs, network congestion and difficulty of use. This leaves the door open to competing networks offering comparable staking rewards as well as cheaper transactions in order to expand their market share.
Hayes argues for Ethereum Bonds
Many analysts believe that the Merge is a big event that can be mistakenly referred to as a “buying the rumor, selling the news” type of event. However, it’s not uncommon for large events such as this one to turn into an “buy the rumor and sell the news” type of event in cryptocurrency.
Decentralized finance (DeFi), educator, and pseudonymous user on Twitter “Korpi”, says that there are many factors that will affect Ether supply and demand after the Merge.
Triple Halvening is a reduction in ETH issuance of 90% after the Merge. This feat would require three Bitcoin halvings to achieve an equivalent supply reduction.
Other positive factors include an increase in the stake reward, as stakers will receive the unburnt revenue from miners. There is also potential for institutional demand due the ability to apply Ethereum’s discounted cash flow model. This “is what institutional investors require to approve multi-million-dollar investments.”
The transition to proof of stake will allow institutional investors to begin to see Ethereum as an internet bond. This is an alternative to US Treasury bonds.
Arthur Hayes, former CEO of BitMEX, explained this concept in detail in a post titled “Five ducking Digits”. He stated that “The native rewards given to validators in ETH-based issuance, network fees for staking Ether on validator nodes renders Ether a bonds.”
The following chart was provided by Hayes, which shows how much Ether could lose and how investors can still make even against the United States bond markets.
The ETH/USD breakeven prices are expressed as a percentage of a spot price at $3,320. Medium
This chart shows that a staking rate of 8% Ether could result in a 32.6% drop in value, but still equal to a 10-year 2.5% bond.
Many analysts are projecting Ether prices of $10,000 or higher in the long-term. This means that many U.S. bond investors could start to seek yields from Ether Staking, rather than the U.S. Bond Market. Assuming the institution infrastructure is approved and available.
Related: Ethereum price “bullish triangle” puts 4-year highs against Bitcoin within reach
There are many ways to trade the Merge
A pseudonymous Twitter user, “ABTestingAlpha”, discussed several trading options for the Merge. He noted that the Merge will result in less selling pressure as proof-of work miners will no longer be selling regular products.
ABTestingAlpha says this will likely be a crowded long trade which means that there will be “a lot of momentum traders getting long Ether into Merge.”
This will result in incremental price gains. However, it is important to keep in mind that traders don’t tend to hold Ether for long-term, so it is important to determine when they will sell.
ABTestingAlpha has announced that the Merge launch will be delayed due to the delay. This leaves many possibilities. The delay pushing the launch into 2022’s second half could mean that momentum traders may sell their tokens, which could lead to a loss of 75% to 80% of Ether gains since mid-March.
If the delay is extended to 2023, sentiment could be crushed and momentum traders will sell short positions. This is the worst case scenario, and Ether liquidity could flow into cash and other layer-1 and layer-2 protocols.
“Outcome: Ether is sold off and all its gains are returned to the Merge, plus 30-50%.”
The situation is now a waiting game, a test of patience and a wait game because the official launch date of the Merge has yet to be announced. Additionally, the crypto market is known for its short attention span.
You would like to learn more about investing and trading in the crypto markets?
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