Institutional investors are buying Ether as Merge event approaches

For seven consecutive weeks, Institutional investors have been investing heavily into Ether-based digital asset funds, as these products have recorded inflows in the weeks in question, according to the latest CoinShares report. Last week, Ether based asset funds recorded inflows of $16.3 million, adding to a total of approximately $160 million in inflows recorded in the last seven weeks.

The inflows seen in the last seven weeks explains the rally we have seen in Ether, the native token of the Ethereum blockchain. When comparing the price of Ether seven weeks ago to its current trading price, the native token has gained 57% from closing the 21st of June at $1,124.82 to stand at $1,770.39 as of the time of this writing.

CoinShares Head of Research James Butterfill explained that the rise in market sentiment for Ethereum-focused products is largely due to “greater clarity” relating to the upcoming Merge, which is set for September 19, 2022. Butterfill stated, “We believe this turn-around in investor sentiment is due to greater clarity on the timing of The Merge where Ethereum shifts from proof-of-work to proof-of-stake.”

The Ethereum “Merge” event

• The Ethereum merge is one of the biggest crypto events of 2022. Ethereum is a layer 1 blockchain that operates a PoW consensus mechanism in which meaning miners must validate transactions. Due to the high level of decentralization that comes with PoW, this consensus mechanism enables the Ethereum blockchain process only 13 TPS.
• Because of the high demand and usage of the Ethereum blockchain, there is now a significant need to scale the speed of the blockchain as transactions done on the blockchain now exceeds over a million a day, according to Etherscan.
• As a result of this issue, the Ethereum developers, led by Vitalik, came up with a solution which is to transition the Ethereum blockchain from a PoW to a PoS consensus mechanism, in order to increase scalability, speed and decrease cost. The transition upgrade can be split up into three major categories, which are; Beacon chain (completed), The merge (September 2022) and Sharding (2023+).

The merge, which is happening in September 2022, can be defined as Ethereum’s official transition from PoW to PoS. It can be broken down into 2 major categories: Deflation, and rewards. In this upgrade, a major benefit will be that Ether, the native token of the Ethereum blockchain, will see its issuance decline from 15k/day to 1.5k/day, representing a 90% cut to emissions. This decline in emissions is very positive, as currently Ether issuance is causing a +3.2% yearly inflation, which reduces the value of the token.

What you should know

• The Goerli and Prater testnet merge is expected to take place this week. These testnet merges are what you can describe as dress rehearsal before the mainnet Merge takes place in less than six weeks’ time.
• Blockchain analytics firm, Glassnode, suggested that the highly-anticipated Merge has crypto traders gearing up to “buy the rumor, and sell the news.” They stated in their newsletter, “Betting on the Merge,” that, “Derivatives traders are placing directionally obvious bets for Ethereum, specifically relating to the upcoming Merge planned on 19 September.”
• Glassnode also noted that post-Merge, the ETH options, and futures market is positioned in what traders call “backwardation,” which is a situation where the current price of an asset is higher than the prices trading in the futures market.

On this, Glassnode stated, “Both futures and options markets are in backwardation after September, suggesting traders are expecting the Merge to be a ‘buy the rumor, sell the news’ style event, and have positioned accordingly.”

However, there is still speculation as to how the Merge will ultimately affect Ether’s price. In a recent interview, Ethereum founder Vitalik Buterin remained optimistic about ETH’s long-term prospects stating that the narrative will likely remain positive post-Merge. He stated, “Once the merge actually happens then I expect morale is going to go way up. I basically expect that the merge is going to be not priced in, by which I mean not even just market terms, but even psychological and narrative terms. In narrative terms, I think it’s not going to be priced in pretty much until after it happens.”