Summary of the thesis
With the Ethereum (ETH-USD) merger around the corner, investors are starting to bet on the outcome. There are at least three possible scenarios, if not more, and specific financial instruments have been designed to bet on one of these outcomes.
In this article, I examine the history of Ethereum forks to try to get some insight into what might happen and lay out my expectations for what will happen to Ethereum in the short and long term after the merger.
play the odds
The Ethereum merger is scheduled for September 15-16 and will mark a historic shift in the crypto world. Ethereum, the second largest cryptocurrency in the world and the most used blockchain for decentralized applications, will change its consensus mechanism from Proof-of-Work to Proof-of-Stake.
This change will have many implications, most of which I discussed in my previous Ethereum article. For example, miners will become obsolete, previously staked Ethereum will be released, and the entire ecosystem will be affected, with “power” now in the hands of large ETH holders instead of miners. On the other hand, the merger should also lead to better efficiency and lower transactions.
That said, not everyone is happy with this outcome, especially miners. This is why a hard fork is to be proposed. This would mean that an “original” ETH network would continue to exist using PoW, presumably co-existing with the “new” merged PoS blockchain. The PoS chain would be Ethereum (ETH), while the forked Ethereum PoW would then have a new cryptocurrency, with ETHPOW being the proposed symbol.
An interesting result is that Bitfinex, a major crypto exchange, has create two tokensETHs and ETHw so traders can bet on the outcome of the merger.
The lessons of history?
In a previous article on Cardano (ADA-USD), I reviewed past network updates. Cardano’s chart showed a pattern of rallies leading to updates and selling off after updates like Shelley and Goguen.
However, applying this same approach to Ethereum leads to inconclusive results.
The images above illustrate previous updates and significant events in ETH history, plotted above the logarithmic chart of ETH.
The London update introduced changes to the ETH fee system, and we can see the price rise somewhat before that and then trade a bit sideways. The Beacon Genesis marked the creation of the first block in the Beacon chain, which is the PoS chain in which ETH merges. Again, the price rose up to and after the event, but this happened during a bull market.
Before that, we saw a selloff leading to Istanbul, followed by a strong rally and the “COVID crash”. Then, before Byzantine, we had some volatility and a strong rally afterwards. Finally, ETH entered a notable bearish phase after the Ethereum Classic (ETC-USD) fork.
There isn’t a very strong pattern here, but if there was, it would be rallies held by ETH after updates. The big wait is the ETC fork, and this is arguably the most similar scenario to the upcoming merger, which could also result in an Ethereum hard fork.
My 2 cents
As I write this, we are two weeks away from the meltdown, and ETH is selling off, having fallen nearly 30% from its recent high. However, I think we are now staging a pre-merger rally, which will then be followed by a selloff. Again, this is based on technical analysis and my fundamental understanding of investor logic.
Since finding a local low at around $850, ETH has moved in a fairly predictable five-wave pattern. We have an initial rally in wave 1, then a retracement in wave 2. Wave 3 reached the 1.618 Fibonacci extensions of wave 1, then wave 5 turned to the 2 ext. This is completely in line with the Elliott wave theory.
These five waves constitute a higher degree Wave I, and we are now in an ABC correction of Wave II, with Wave A almost complete:
Based on this analysis, a reasonable target for wave II would be around $1200, which is the 61.8% retracement of wave I. However, before reaching this final level, we would need to bounce strongly in Wave B, which may even exceed previous highs. .
So based on this count, I think ETH will rally strongly as the merger approaches, then sell off aggressively after or just before.
It also makes sense from a “fundamental” perspective regarding supply and demand dynamics and previous fork events. For starters, as the merger nears, a sufficient amount of Ethereum will be released, creating some supply pressure. In fact, there is evidence that the “whales”, the large ETH wallets, have moved their holdings to exchanges, probably with the idea of selling.
The merger will also be a time of confusion and inherent volatility. I expect problems to arise, as do other investors. It also creates selling pressure.
Finally, the fact that a contingent of the Ethereum community is looking to fork Ethereum into ETHPOW will also create doubt and pressure on the price.
That said, do I think ETHPOW will compete with Ethereum? If history is any indication, it’s unlikely. Although Ethereum Classic is still a top cryptocurrency today, it pales in comparison to Ethereum, and there is no real innovation in app development. The decision to move ETH to a PoS consensus mechanism was deliberate and well researched. There’s a reason for that, and I think it’s the right decision.
Overall, the upcoming merger will certainly be surrounded by volatility. I expect both a big up swing and a big down swing. However, when the dust settles, ETH will be poised to continue to rally and reach new all-time highs as it will remain the go-to blockchain for developers in the crypto space.