The announcement of a proposed date for the transition from a proof-of-work protocol to a proof-of-stake protocol signaled a resurgence of optimism in crypto markets.
Ether (ETH), the second-largest cryptocurrency by market cap, is up 45 percent this week, outperforming most other assets. Traders are turning bullish as Ethereum’s development team nears the end of a multiyear, extremely complicated upgrade.
Nathaniel Whittemore, a well-known podcaster and industry watcher, suggested as much in his most recent episode of “The Breakdown.” On Twitter, Discord, and everywhere else people talk about cryptocurrency, there’s a growing recognition that “The Merge” could drive markets.
The market rally began last week, when Ethereum developer Tim Beiko proposed on September 19, during an open developer’s call, that the network finally switch from proof-of-work, an energy-intensive method of securing blockchains, to the more environmentally friendly proof-of-stake protocol.
According to Whittemore, the event signals a “return of optimism” in crypto markets after a months-long period of low prices. Furthermore, the Merge fills a “narrative void,” or the stories that crypto enthusiasts can tell others about how this technology is reshaping the world.
The Utility of Narratives
Narratives can help people coordinate actions as well as shared beliefs. They can, however, be dangerous delusions, such as Three Arrows Capital co-founder Su Zhu’s concept of “the supercycle,” which holds that the most recent crypto rally is sustainable.
Numerous firms contributed capital to Zhu’s hedge fund in part because of that idea, only to see 3AC implode as a result of the crushing reality of several bad trades and a deteriorating market.
There are several reasons to be optimistic about Ethereum: The Merge, in particular, would be the most sophisticated upgrade in the 14-year history of the digital asset industry. It would transfer ETH to a less environmentally damaging system while also improving the functionality of the most widely used blockchain. It may also help to promote cryptocurrency in the media.
Others see structural reasons why the Merge could accelerate price increases. The upgrade represents a structural change in how Ethereum can be used, rewarding holders who stake their assets with the network. The shift could even result in Bitcoin-like deflationary pressures that reward holders even more. People who are buying ETH now in anticipation may see it as more of an investment than a trade in this scenario.
“There will be almost no sell pressure when the Merge occurs.” “Everyone who is staking is locked up, everyone who still has money in stETH is holding until it repegs, anyone who had money on Voyager or Celsius is locked in bankruptcy proceedings for 5-10yrs,” crypto commenter Ethereum Jesus tweeted, referring to the bankruptcy filings of cryptocurrency broker Voyager and cryptocurrency lender Celsius Network.
None of this, like all narratives, must be true for people to believe or trade. In a supreme example of the feedback loops that drive many crypto pumps, there is a growing recognition that people could “buy the news” of the Merge.
Nonetheless, a Risky Trade
The hope is that a “dump” will not occur. The Merge represents the culmination of years of work, countless brain cycles, nearly infinite testnets, and ETH’s biggest backer’s commitment to not only improving the network, but also ensuring its long-term viability.
That’s the story people might believe. However, it is critical to recognize that this is still a risky trade and that there are long-term regulatory and technological risks that crypto faces.
Whittemore began his show by discussing how crypto, “like every asset class,” is subject to larger macroeconomic forces such as the Federal Reserve’s efforts to control inflation and a potential recession in the United States.
“Crypto is not immune,” Whittemore warned, adding that a “true bull market” is unlikely to return until the Fed stops tightening. But, in the meantime, it appears that crypto has a different story.
Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.