Ether, the native token of the Ethereum blockchain, the largest smart contract blockchain in the entire cryptocurrency ecosystem, has seen its price rally above $2,000 per token, for the first time since May 19, 2022. This is as we inch closer to the monumental move from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS), a switch which is dubbed, “The Merge.”
This event is currently the most talked about in the ecosystem and due to the excitement, we have seen the price of Ether, rally approximately 20% in the last seven trading days, with the bulls taking charge of the market. Interestingly, the attention on Ether has trickled down to reenergize Bitcoin bulls as the flagship cryptocurrency asset traded above the elusive $25,000 range, a price point not traded since June 13, 2022.
Now that bulls are making headlines, especially now that data from CoinShares reveals that for seven consecutive weeks, institutional investors have been investing heavily into Ether-based digital asset funds, it begs the question as to whether or not it is a good time to buy Ether, with many traders including CNBC anchor, Jim Cramer, stating that the bottom of the crypto winter has already been set.
Summary of the Merge
Ethereum is the largest Decentralized Finance (DeFi) platform, accounting for $39.22 billion or 58.50% of the Total Value Locked (TVL), it is also the largest NFT blockchain platform as it accounts for 83.90% or $15.72 billion of the NFT trading volume seen have seen to the end of July 2022.
- Being that the Ethereum blockchain is one of the biggest blockchains due to its high demand and usage and also due to the high level of decentralization that comes with PoW, 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.
- With the Ethereum blockchain only able to process 13 Transactions Per Second (TPS), it has led to extremely slow transaction speeds and high gas fees when transacting on the blockchain. The PoW consensus limits Ethereum’s ability to effectively scale which means that the Ethereum Blockchain simply cannot handle the demand.
- Because of this, other blockchains capitalized on this shortcoming of the Ethereum blockchain and they created their own Blockchains which are generally known as alternate L1s or “ETH killers,” which TPS’s far surpasses that of Ethereum’s. These Ethereum Killers have had a rapid rise as many users have flocked to them, due to their speed and cheap transaction fees. This caused Ethereum’s market share by Total Value Locked (TVL) on DeFi Llama has declined from 100% to 55% in the space of 2 years.
- As a result of this issue, the Ethereum developers, led by Vitalik Buterin, 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 expected to happen between the 16th and 19th of 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. After the merge, Ether’s supply will decrease by -0.9% ensuring that the token will finally become a deflationary token, in which scarcity ensures that the token will be more valuable.
Should you buy Ether today?
- With Bitcoin leading the rally, we have seen the altcoin market capitalization rally above $700 billion. The move is impressive as it breaks a troublesome sell zone that had previously kept bulls in check since May. Noting a trend to pile into altcoins developing, on-chain analytics firm Glassnode eyed a desire among investors to heighten risk exposure in the current atmosphere.
- Co-founders of Glassnode, Yann Allemann and Jan Happel, wrote in the latest edition of their “Uncharted” newsletter that, “According to Swissblock’s Altcoin Cycle Signal, some of bitcoin’s force tempered as investors divested into altcoins in a lower-risk environment. Since Ethereum’s merge became clearer, Ethereum has outperformed bitcoin, driving altcoins higher.”
- Although many are excited amount the move above $2,000, traders nonetheless, have remained conservative after months of upside. A popular account, Crypto Chase, explained, “$ETH to $2200 as long as we stay above $1737. Once untapped highs start getting tapped (and no reversal is given), the rest of the highs typically meet the same fate. Don’t have my eyes on an exact level or setup for long opportunity just yet but will update if I see one.”
To conclude, while the Merge is an exciting event as a move like this has never been done before, investors are advised to hold a neutral position, as the current rally could be a “buy the testnet and sell the mainnet,” situation, one that we saw last year 2021, when Cardano’s ADA hit an all-time high, leading to the launch of its smart contract platform and it immediately began to decline.
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