Ether falls this week as ‘merger’ hype wears off. The crypto outlook from here
by Arthur · September 16, 2022
Ether is about to post its worst week since mid-June, after the long-awaited Ethereum merger turned out to be the exact sell-on-the-news event many predicted. After an initially muted market response to the event, the price of the second largest crypto asset by market capitalization turned lower on Thursday and is now down 15% for the week. The cryptocurrency plummeted despite the Ethereum network successfully completing what has been hailed as a monumental technological upgrade that will have long-lasting effects for the crypto industry at large. “From a purely technological perspective, it’s hard to overstate the engineering feat the merger represents,” said Anto Paroian, CEO of cryptocurrency hedge fund ARK36. “It’s more or less like designing a new engine for a car going full speed and then switching engines without the car ever stopping or braking. That it was orchestrated by a global network of developers not managed by any central entity is already a triumph of the core ideals of the crypto space.” Meanwhile, the so-called “forked” version of Ethereum – whose launch many expected to know proof-of-work Ethereum miners would soon have to find a new home – saw its price drop. ETHPoW (as in Ethereum proof-of-work) fell from around $21 on Thursday afternoon to around $9 on Friday, according to CoinMarketCap. What happened after the merger On Thursday, ether futures funding rates also fell near all-time lows, as many traders bet that the price would drop after the merger to take advantage of an arbitrage trade. Funding rates represent traders’ sentiments in the ever-changing exchange market. Negative funding rates indicate that short position traders are dominant. Many have bought spot ether and shorted ether perpetual futures, to get tokens of the “forked” version of Ethereum for free, without exposure to ether price. Some analysts said they expected to see trading ease after the merger. “ETH funding rates are starting to normalize back to pre-merger levels following the distortion after users shorted ETHperps and held spot ETH to be eligible for the ETHPoW airdrop,” Citi said in a note on Friday. “The futures basis has now started to normalize … because holders of ETH would be eligible for the airdrop at the time of the merger, meaning there is no longer an incentive to hold ETH for a post-merger airdrop.” What’s Next No one is uncertain about the results of the merger – Ethereum is now 99.95% more energy efficient than it was before the transition, ether is now a yield-generating asset, and issuance has fallen 90%. These benefits alone should make the network more attractive to institutional investors who have been watching from the sidelines. However, it is now an event of the past. The impact of the merger may take a long time to feel, and on top of that, macro drivers still have a strong grip on the market. This week, investors digested hotter than expected inflation data. Now they are holding their breath until the Federal Reserve’s meeting next week. “Unfortunately, we’re still stuck in this, and it hasn’t really been that catalyst to disconnect crypto markets from macro trends,” Okcoin CEO Jason Lau said on CNBC’s “Crypto World.” “The merger could potentially be one of those events. However, we haven’t seen that play out either. In practical terms, the merger doesn’t do much for ether at this stage – it’s really the first step in a series of upgrades.” Needham’s John Todaro added to that point, saying that while the results of the merger are “obvious,” it could take at least six months to see them in the wild. “The changes resulting from the merger will likely take 6 months+ to actually have an impact on ecosystem,” he said. “The merger paves the way for future technology upgrades that will provide improved scalability … but this is still months if not years away.” Some are also beginning to worry that ether’s new revenue-generating opportunity could cause it to look like a security in the eyes of regulators. On Thursday, Securities and Exchange Commission Chairman Gary Gensler said that staking coins could pass a key test of whether investors expect to profit from the work of third parties, The Wall Street Journal reported. The Howey test , as it is known, is often used to determine whether an asset is a security. Lau said that despite Ethereum’s great environmental achievements, it is only a fraction of the serious investors think about. “Institutions that are still on the sidelines are still setting up and getting ready to dip their toes in. They don’t see the merger as that trigger point, mostly because a lot of the blocks are not related to crypto at all.” he said. “It’s actually related to their own compliance procedures, their own legal teams getting comfortable with their counterparties, for example, to understand the kinds of regulatory risks that might exist.”
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