Ethereum’s long-awaited transition from Proof-of-Work (PoW) to a faster, more energy-efficient Proof-of-Stake (PoS) blockchain — aka “the Merge” — is now just a few weeks away.
Following the recent successful integration of the Goerli testnet, the Merge, which was originally planned to go ahead back in 2019, has finally been locked in for mid-September.
The resulting Merge-related excitement has seen the price of the Ethereum network’s native token, Ether (ETH), grow 63% over the last two months. ETH’s rapid, market-outpacing growth has also reignited discussions of ‘the flippening’ as Ethereum advocates once again entertain the possibility that ETH could soon replace Bitcoin (BTC) as the number one digital asset in the crypto market.
While the Merge is recognised as a positive step forward for the cryptocurrency and blockchain industry, the transition is projected to have unintended effects on the broader crypto market.
The Merge upgrade will see the Ethereum network go from handling 30 transactions per second (TPS) to 100,000 TPS and will reduce its energy consumption by 99.95%. This upgrade comes at a substantial cost to miners, who, the second the Merge is declared a success, will be completely out of a job.
A research report from JPMorgan released on August 10 has shed some light on how the post-Merge environment will see existing ETH miners potentially adapt to alternative lines of work.
According to the report, Ethereum mining is mostly done with GPU (graphics processing unit) mining rigs, which have a wider array of use cases than the more single-focus ASIC rigs used for Bitcoin mining.
This means the existing mining setups can be easily repurposed to mine other PoW cryptocurrencies such as Ethereum Classic (ETC), Ravencoin (RVN) and Ergo (ERG), as well as being resold on the retail market to be used by gamers.
Unfortunately, current ETH miners will almost certainly suffer in the short term, as the abrupt shift to mining other cryptocurrencies and the time consumed by swapping over rigs will squeeze profit margins. Additionally, the initial flood of mining resources across the broader crypto mining economy could see the incomes of a lot of the smaller operations come under threat.
Ultimately, Ethereum Classic miners are set to be the most significant beneficiaries of the transition, simply because of the sheer volume of cheap second-hand mining rigs that are bound to hit the market. The bank also said that investors may use ETC as a “hedge against any potential disruptions in the Ethereum blockchain during the shift from PoW to PoS”.
The signs of this shift are already making themselves clear, with ETC witnessing a near 50% increase in its hashrate over the last month.
While investors and miners can expect the next few weeks to be tumultuous, JPMorgan expects that mining operations in the broader economy will begin to transition more smoothly as we get closer to the Merge.
What happens to the price of ETH?
It isn’t all about mining, though, and crypto investors are on the edge of their seats — all trying to figure out what the Merge might do to the price of Ether and the contents of their crypto wallets.
Adding to the apprehension is the fact that opinions shared across Crypto Twitter seem to be at odds. One group of experts claim that the Merge will be a ‘sell the news’-style event and everyone who loaded up on ETH over the past month will get rekt as the market realises the Merge was completely overhyped.
On the other side of this, we have a series of equally knowledgeable experts claiming that a successful transition will bolster Ether’s value and send crypto markets wild.
So who’s actually right?
Unsurprisingly, Ethereum co-founder Vitalik Buterin is bullish on Ethereum’s value and success over the long-term, telling Bankless last week:
“I basically expect that the merge is going to be kind of not priced in, by which I mean like not even just like market terms but even just kind of like psychological and narrative terms.”
And while industry experts’ opinions differ on whether ETH is underpriced, many significant figures throughout the market see a bright future for the Ethereum Network.
According to Kraken Intelligence’s latest Monthly Market Recap and Outlook report, there are several signals of investors increasing their confidence in Ethereum, with volatility decreasing and outflows of Ethereum more than double the inflows in July.
“ETH is holding value during this crypto winter against [Bitcoin] BTC — a significant departure from the prior cycle. All eyes are on the Merge, the most significant milestone to Ethereum’s scaling roadmap since the launch of the Beacon Chain in late 2020. If successful, the industry will have the clarity to take a longer-term outlook on Ethereum,” says Thomas Perfumo, Head of Business Operations at Kraken.
Perhaps the most bullish of all the crypto commentators is former BitMEX CEO Arthur Hayes, who predicts a $5000 ETH price by May 2023 following a successful Merge. In a blog post titled “ETH-Flexive”, Hayes outlines his reasoning for why he believes the price of Ethereum will surge post-Merge.
“If the merge is successful… traders will buy ETH today, knowing that the higher the price goes, the more the network will be used and the more deflationary it will become, driving the price higher, causing the network to be used more, and so on and so forth,” he explained.
“This is a virtuous circle for bulls,” Hayes concluded.
On the flip-side of this, however, is Galois Capital, a California-based crypto trading firm with a major presence on Crypto Twitter.
Galois told their nearly 50,000 followers that while the Merge is “accretive” (meaning prices go up), they think the market is overexcited and hasn’t properly priced in any of the downsides.
In a Twitter thread containing a long list of fairly technical considerations, Galois outlined the overall reasoning for their contrarian approach:
“When everyone is doing the same thing, it is generally +EV [positive expected value] to do the opposite even if the probability is lower.”
Galois further bolstered this thesis, saying that even though there’s a very slight risk of an unsuccessful Merge, the “failure risks are not correctly priced” and any discussions about these risks are being “hand-waved away by Merge bulls”.
Back to the fundamentals
While hot takes and wild predictions run rampant across Crypto Twitter, The Chainsaw spoke with Richard Fetyko, founder and CEO of crypto analytics platform altFINS, for some more balanced analysis on ETH’s future price action.
Fetyko thinks that while ‘buy the rumour, sell the news’ may be a tempting thesis to entertain, there’s simply too much macro-evidence that points to continued buying and upwards price action.
“When we assess the near-term drivers of demand and supply for ETH, we find overwhelming reasons to think that after The Merge, demand from buyers will outstrip the supply from sellers,” Fetyko explains.
“Demand, particularly from institutional investors, will be driven by increased staking yield, a lower carbon footprint (greener) from the PoS mechanism, and a growing number of staking platforms offering ETH staking post-Merge. Also, ETH will have de-risked after successful migration to PoS,” he said.
Surge, Verge, Purge and Splurge?
In an attempt to provide a bigger picture overview of Ethereum’s post-Merge future, co-founder Vitalik Buterin has uploaded a pretty complex flow chart outlining the road ahead for the Ethereum network, which was then re-posted in a simplified post-Merge Ethereum explainer by a user named 0xAlec on Twitter.
The parallel stages of Ethereum’s lifecycle, humorously named the Surge, Verge, Purge and Splurge, all point to continued growth and scalability of the Ethereum project.
While flow charts can help to get an idea of the bigger picture, the blockchain industry is one of the most fast-moving and technologically volatile spaces in the world, making it practically impossible to make long-term predictions with any shred of certainty.
With that being said, the majority of analysts seem to conclude that there is an undeniably bright road ahead for the Ethereum network. Only the most risk-hungry of trading firms (I’m looking at you Galois) are loading up on the contrarian bear thesis, looking for that delicious Michael Burry flavoured morsel of completely unconsidered fallout.