It’s time to “merge”.
A system-wide upgrade to the Ethereum blockchain is set to launch on Wednesday, marking one of the most historic events in the crypto sector to date. In the lead-up to the overhaul, investors were jumping into ether, the original symbol of ethereum.
In the past three months, ether has jumped 32%, significantly outperforming bitcoin, which is down 9%. While analysts say the anticipation around the consolidation has helped lift prices, some experts see the real upside coming after the consolidation occurs.
“We believe that after the merger the strong case for Ethereum will be much stronger for a number of reasons,” said Katie Talati, head of research at Arca Asset Management. The main factor, she says, is that supply will go down a lot, leading to scarcity.
The distinguishing feature of the Ethereum transformation is that it will take a lot of energy to verify transactions, which has always been a huge problem for the cryptocurrency industry. The Proof of Stake model, which replaces the Proof of Work model, requires validators on the network to roll out their ether tokens, or “stakes,” essentially taking them out of circulation for an extended period of time, in order to secure the network.
“Probably for six to 12 months – there are no specific guidelines yet from the Ethereum developers – you will not be able to withdraw Ethereum once you install it for network validation,” Talati said.
Reducing energy consumption by more than 99% would also go a long way toward lowering the barrier to entry for institutional investors, who have been struggling with optics to contribute to the climate crisis. Last week, the White House issued a report warning that proof-of-work mining could hamper efforts to mitigate climate change.
However, some skepticism is creeping into the market.
Ether is down about 6% in the past 24 hours after the last official reading of US inflation, which was punished by risky assets on Tuesday and tech stocks to their worst day in more than two years.
Whether it’s buying now or waiting and seeing how the merger goes, said Jaydeep Korde, CEO of Etherum Infrastructure, Launchnodes, depends on the investor’s time horizon to hold the coins. Cordy tells CNBC that traders who plan to sit on their stake in the long-term — in the two to three year range — should be in good shape.
“If you’re looking at the shorter-term horizon in terms of trading, I think it’s more volatile,” Cord said. He cited global economic conditions, geopolitics and inflation as playing a role in direct risk.
Like any other asset class, Ethereum will suffer from the challenges of this volatility,” Cordy said.
Arouse institutional interest
With the upgrade, Ethereum will no longer become faster, cheaper, or more scalable. One developer even told CNBC that if the user experience feels the same, it would be one sign that the integration was completely successful.
The real draw for investors is to cut back on energy use, especially since bitcoin mining continues to face negative consequences for its increased energy consumption.
Since its inception nearly a decade ago, ether — similar to bitcoin — has been mined through a Proof of Work model. It involves complex mathematical equations that a huge number of machines race to solve, and here It uses an abundance of energy.
The new Proof of Stake method requires users to take advantage of the existing ether cache as a means of verifying transactions and securing the network.
According to an estimate on the Ethereum Foundation blog, the merger will result in at least a 99.95% reduction in total energy usage.
The matter is significant . Bank of America said in a note dated September 9th Lower power consumption after the merger could “enable some institutional investors to buy tokens that were previously prohibited from buying tokens that run on blockchains that take advantage of Proof of Work (PoW) consensus mechanisms.”
Institutional funds are key to the maturity of digital assets. Research firm Fundstrat wrote in a note that a successful merger would cement Ethereum as the “first blockchain network.”
Ethereum stood out from the competition chains, as more of an operating system for the industry. The vast majority of applications are built on top of ethereum, and the merger is the first in a series of planned upgrades that should eventually lead to faster and cheaper transactions.
The dwindling supply of cryptocurrency, which some investors say may be a boon for the price, is the result of a new verification model that replaces miners with “verifiers.”
The rewards for validators are much smaller than those that went to proof-of-work miners, which means that less ether will be poured in as a result of this upgrade.
In addition, as part of the upgrade that took effect last August, the network is permanently “burning,” or destroying, part of the digital currency that could have been recycled back into circulation.
Talati says people might look back in three to six months and say, “That was the tipping point and tipping point for Ethereum.”
The Bitcoin network experiences a similar type of supply decline about every four years.
Bitcoin production drops dramatically over time, thanks to the so-called “halving,” or “halving,” when the size of the prize awarded to miners is halved. The Bitcoin halving was created by its pseudonymous founder, Satoshi Nakamoto, As a way to fend off cryptocurrency inflation.
“Bitcoin can’t issue more shares,” Fundstrat’s Tom Lee previously told CNBC. “It does not do stock splits or dividends, so the only way to increase the value of the bitcoin network is for the unit price to go up.”
There have been three halvings of bitcoin so far. The most recent, in May 2020, preceded a sharp rally that continued into late 2021, before the cryptocurrency “winter” began.
For ether, the Ultrasound Money website has simulated the upcoming changes to the show. In her model, annual issuance drops from 5.5 million tokens to 600,000, and she estimates supply growth to drop to 0.1% from 4.1%.
Regardless of the changing dynamics that come with consolidation, the cryptocurrency market is likely to remain driven in part by a huge dose of pure speculation and events that have nothing to do with the fundamentals of tokens or blockchain networks.
The sharp sell-off this year – the ether is down 56% even after the recent rally – is linked to higher interest rates and the Federal Reserve’s efforts to curb inflation.
Investors have been rotating risky assets, even those that are supposed to act as a hedge against inflation, so the merger may not change investor sentiment immediately.
Watch: Bitcoin Drops Below $19,000 As Ethereum Upgrade Begins