Crypto investors still haven’t priced in the upside from the Ethereum merger, JPMorgan says
by Arthur · October 11, 2022
The excitement surrounding the merger has already faded, but the long-term benefits Ethereum will reap from the technical upgrade have yet to be realized, according to JPMorgan. After leading the crypto market in the late summer ahead of the event, and enjoying a pre-merger rally, ether ended up being a sell-the-news event. It ended with a decline of around 15% in September and underperformed other cryptocurrencies. The merger refers to a technical transition intended to improve safety in a way that reduced energy consumption by almost 100%. It was a base layer intended to give way to a series of planned upgrades that will eventually tackle Ethereum’s biggest problems, such as its processing capacity and high transaction fees, also known as gas fees. “The cryptocurrency market still needs a catalyst, and while the merger is the first step in a series of upgrades to Ethereum, the market has yet to price the upside that could come from increased capacity and throughput that we see as Ethereum’s roadmap has been executed,” Kenneth Worthington, an analyst at JPMorgan, said in a recent note. One of the most attractive potential outcomes of the merger for investors, a smaller supply of ether, hasn’t quite materialized yet, but JPMorgan says it’s still early days. While ether supply has continued to increase since the merger, it has slowed to a minimal pace, Worthington said. It could start to fall if transaction activity were to pick up and block fees, which have been significantly reduced since July, were to pick up again, he added. Another selling point for investors, higher interest rates, has changed more slowly than many had hoped. However, it has increased as expected to around 5.05% from 4.2% before the merger. Maximum recoverable value could add more than 100 basis points to returns, Worthington said. In the near term, crypto assets including ether are in a holding pattern as they wait for both a new catalyst to draw investors into the market and, more importantly, for the Federal Reserve to veer away from its path of aggressive rate hikes. That means the biggest use case for any cryptocurrency is still speculation, but Ethereum will be a key player in changing that down the road, according to JPMorgan. “We believe the Ethereum merger could be a big factor in increasing the adoption of blockchain into new areas, including financial services,” Worthington said, highlighting decentralized finance and NFTs.
