As we near the Ethereum merge, what scenarios will affect ETH sentiment, bullish or bearish, and what can be used to determine the success of the merge?
The Goerli testnet merge (the last testnet) was successful, which paved the way for further gains in ETHUSD. Ethereum is due to transition from proof of work to proof of stake in mid-September, which has been the catalyst for the recent market sentiment.
Exploring ETH options open interest is providing a glance into investors' expectations:
source: coinglass
Ethereum options open interest rose significantly, which is reflecting the renewed interest in the cryptocurrency. The top strike prices for the call options at the time of writing are $3,000 (ETH 407,730), $3,500 (ETH 323,570) and $4,000 (ETH 387,730).
The debate among crypto analysts is whether Ethereum's recent gains are a result of buying the rumour, selling the news or the merge will indeed be the starting point of a larger bullish retracement.
Ethereum merge predictions are mixed, it is important to understand what is affecting the price and what events are seen as bearish and bullish.
Before diving into the possible scenarios; it is important to be aware that exchanges may pause ether deposits and withdrawals during the merge, which will take place in September 2022.
Coinbase Will Pause ETH Deposits and Withdrawals
Compound Labs Co-Founder, Robert Leshner described the merge as swapping a spaceship's engine in mid-flight. As the merge takes place, increased activities in bots are likely to take place.
Coinbase is concerned that the becon merge may not be as smooth as expected, announcing that it will pause ETH and ERC-20 token deposits and withdrawals during the merge.
"During the Merge, Coinbase will briefly pause new Ethereum (ETH) and ERC-20 token deposits and withdrawals as a precautionary measure.
"Although the Merge is expected to be seamless from a user perspective, this downtime allows us to ensure that the transition has been successfully reflected by our systems.
"We do not expect any other networks or currencies to be impacted and expect no impact to trading for ETH and ERC-20 tokens across our centralized trading products."
source: coinbase
Some are expecting other crypto exchanges to follow suit. When Luna 2.0 was released, Terra Classic validators were reporting the price of Luna 2.0 by error.
Terra classic was trading at $0.0013 while Luna 2.0 was trading at $9.83. Validators were running an old version of the oracle software, which led to the exploit.
Pools were drained as a result; millions of dollars were earned by bad actors that exploited the ecosystem.
Layer 2 Scaling Solutions May Prevail
Ethereum layer 2 solutions such as Polygon (Matic), Optimism (OP) and Arbitrum (Arbitrum has no token) may continue prevailing despite Ethereum's transition to proof of stake.
Over the past year, ETH gained $9.9 billion in revenue compared to a total of $78 million on the above layer 2 mainnets. The merge may cause some volatility as at the time of writing, ETH layer 2 Web 3.0 solutions were highly correlated to the ether price.
The parent company of Mercedes Benz (Daimler Group) announced it will launch a data-sharing platform on Polygon.
source: Twitter
The data-sharing platform is called Acentrik. It will allow users to trade data on the platform, such as insurance details, scientific trials and more. Each data set will be presented by a non-fungible token (NFT).
Coca-Cola recently launched its NFTs on the Polygon network. Despite the upcoming merge, businesses still opt for layer 2's.
Lido Finance announced it has partnered with KyberSwap Elastic (an automated market maker, supplies liquidity providers with deeper liquidity) to improve liquidity on Polygon. Five pools are available.
GK8, a digital asset custody platform announced a new integration with Polygon, which may only contribute to the network.
Optimism network, which was only launched recently has gained the interest of large DeFi projects. Iron Bank, Homora and Yearn Finance joined optimism, which contributed to its recent gains.
source: defillama
The total value locked (TVL) is over $1B in Optimism at the time of writing. Almost half the locked tokens are from Aave, ETH-based borrowing and lending protocol.
Dark Ghosty, integrations lead of Yearn Finance explained why Optimism was chosen: “We're excited about Optimism for the users who were priced out of yVaults on Ethereum.
"With the additional liquidity flexibility that Iron Bank provides as a protocol-to-protocol lending partner, people can get the best risk-adjusted yield in DeFi without having to worry about high gas costs on a super-fast chain.”
Arbitrum recently launched Arbitrum Nova scaling solution. Offchain Labs, the company behind Arbitrum launched a new chain, Arbitrum Nova. Based on AnyTrust technology, Arbitrum Nova is designed for social and gaming apps while Arbitrum One will be for NFTs and decentralized finance projects.
Reddit's community points system makes use of Arbitrum Nova. FTX Pay will be integrated into Reddit's systems.
Vitalik Buterin, the Founder of Ethereum said layer 2 rollups will increase crypto payments adoption. At the Korea Blockchain Week (KBW) Buterin stated the following:
"So today with roll ups, transaction fees are generally somewhere between $0.25, sometimes $0.10, and in the future with roll ups with all of the improvements to efficiency that I talked about.
"The transaction costs could go down to $0.05, or even maybe as low as $0.02. So much cheaper, much more affordable, and a complete game changer."
As ether layer 2 networks continue to evolve, the upcoming merge is unlikely to mark the end of scaling solutions.
How Will Ethereum Trade Post-Merge?
Prior to risk events, traders often downsize their net exposure to the given instrument. A recent example can be seen from the US indices futures such as the Dow Jones, which has corrected lower ahead of the minutes.
As the Ethereum beacon merge may be considered a significant event, investors may reduce their ETH holdings as a precaution.
Enigma, a digital assets advisory is using stETH (Lido staked ETH) to forecast the success of the merge. At the time of writing 1 stETH is worth 0.973 ETH.
source: tradingview
Enigma suggests that it implies a 93.5% - 93.75% chance for a successful merge.
Using Enigma's model, if stETH gap from ETH increases, it may suggest the market is less confident and the merge will be smooth. It may reflect in ETH holders further reducing their exposure as we near the merge, most likely several days prior to the scheduled date in September.
Investors may monitor stETH/ETH to assess the market sentiment on the merge. Another event that may take place and have a significant impact on Etheruem is ETH miners, which may lead to a hard fork.
ETH Miners Hard Fork
When Ethereum shifts from PoW to PoS, ETH miners will lose their source of income. The network will rely on validators rather than miners.
Ethereum Classic may appear as an appropriate alternative, however, it cannot contain all ETH miners. Some miners have already shifted to Ethereum Classic as evident from the uptick in the hash rate.
source: 2miners
One of the possible scenarios is a hard fork (the chain will be referred to as EthereumPOW), which may have a negative effect on the ETH price. The miners will have their own ETH network based on proof of work.
Justin Sun, the Founder of Tron said he will support the ecosystem in the hard fork is successful:
"We currently have more than 1 million ETH,” Sun said in a tweet on Thursday. “If Ethereum hard fork succeeds, we will donate some forked ETHW to ETHW community and developers to build Ethereum ecosystem.”
Poloniex crypto exchange also affirmed its support for the fork:
“Poloniex will give full support to ETH’s upgrade and its potential hard fork. If successful, the Merge could create two parallel blockchains after the upgrade. All Ethereum (ETH) holders on Poloniex will receive the forked assets at a 1:1 ratio when the upgrade is completed.”
More crypto exchanges see the opportunity the hard fork may bring. MEXC crypto exchange is offering 2 tokens, ETHS and ETHW.
ETHS represents the ether chain that is based on PoS while ETHW is the forked chain (should it indeed take place at the merge) that will be based on PoW.
ETHS/USDT and ETHW/USDT are available for trading at MEXC.
Bitrue, a cryptocurrency exchange in Singapore followed the steps of MEXC and announced ETHS and ETHW will be available for trading on the platform. In an event ETHW will never materialize, ETHW will automatically convert to ETHS.
As we near September, more cryptocurrency platforms may add both ETHW and ETHS to their trading platforms.
Forking ETH may initially result in a price drop in Ethereum 2.0. At the time of writing, it is challenging to assess whether the hard fork will in fact take place.
Investors Are Forgetting the Federal Reserve
The merge date is expected to be around 15 September, a week (approx.) before the Fed monetary policy meeting. A large chunk of ETH recovery was due to the US CPI, which came in below market expectations, largely due to crude oil's recent weakness.
source: tradingeconomics
A nuclear deal with Iran will contribute to further weakness in crude oil, which may, in turn, reflect lower inflation figures. The Biden administration is interested in a lower crude oil price prior to the US midterm elections on 8 November 2022.
Despite inflation figures cooling down, inflation is still relatively high. The CPI, as well as Core CPI figures, will continue playing a significant role in ETH sentiment.
The outcome of the Fed monetary policy may have a greater impact on Ethereum as well as Bitcoin than the merge itself. The FOMC minutes that will be released on Wednesday (in several hours) and may hint at how aggressive the Fed will be on future rate hikes.
Some volatility is expected in Ethereum and Bitcoin upon the release of the FOMC minutes.
The next US CPI figures are due on 13 September, days before the merge is expected to take place. These figures should be the center of attention for every crypto investor.
A week after the Fed will present its monetary policy.
source: tradingview, ETHUSD
The breakout below the neckline (in blue) leads to further weakness. The 21MA (orange) is acting as the nearest resistance based on ETHUSD weekly chart.
A weekly close above the 21MA may allow the price to extend its gains, targeting the breached neckline (blue), which is the major hurdle Ethereum must overcome (around $3,000 at the time of writing).
Some support is offered at $1,680, which if tested may contain further weakness. At the time of writing, Ethereum is weakening in tandem with the US indices ahead of the FOMC Minutes.
