Get ready for one of the most volatile weeks the crypto market has ever seen. In 3-4 days time, Ethereum will transition from proof of work to proof of stake, and it could quite literally make or break the crypto market. This is simply because most of the crypto ecosystem lives on Ethereum, including most stablecoins. If anything goes wrong during the merge, the crypto market will crash hard. If it goes smoothly, expect double digit gains across the board.
There are two other important factors adding to the volatility as well, and the first is the balance of ETH on exchanges. As I mentioned on Twitter, the balance of ETH on exchanges has been steadily declining over the last year. Although there has been a slight uptick over the last week or so, it’s not nearly as much as the headlines suggest. This means that ETH holders are HODLing, which is awesome, but it also means ETH’s price will be more volatile.
Meanwhile the balance of BTC on exchanges recently spiked by quite a bit and looks like it could continue to spike. I suspect that there are many BTC holders who are looking to trade the upcoming merge. This would make sense because ETH recently broke out of a massive accumulation pattern against BTC on the weekly chart. Assuming the current pattern plays out, ETH could rise from ~0.08 BTC to over 0.1 BTC, the highest since the last crypto cycle!
The second important factor to watch is the August inflation figures for the United States, which will be released this Wednesday, the 13th September. In case you didn’t notice, this will be shortly before or even during the merge. Assuming the inflation figures come in cooler than the month before, we could see a massive rally. Logically, if inflation comes in hotter than expected, we could see a big crash. You can thank the Fed for this crazy effect.
If you’re wondering what happens after the merge, that’s really anyone’s guess at this point in time. Chainalysis’ guess is that ETH could decouple from the rest of the crypto market, meaning its price would no longer be as dependent on BTC. Chainalysis believes that this will happen because of the supposedly high staking rewards on Ethereum’s Beacon Chain. However, according to Dune Analytics, ETH staking rewards could be as low as 4%.
More importantly, ETH would almost certainly be thrown into the high-risk bucket by institutional investors, meaning its price action would still be heavily correlated to that of tech stocks, as the rest of the crypto market currently is. This also means that the crypto market could be headed for an even larger crash later this year, including ETH. This is especially because retail investors apparently haven’t capitulated yet.
Even so, there is one scenario where ETH could decouple from both tech stocks and the rest of the crypto market, and it’s one that I’ve mentioned many times before: stablecoins. As you might have noticed, the USD has been rising against just about every other fiat currency. At the same time, inflation is making life ever more unaffordable for the average person. It’s not surprising then that many of them are starting to turn to US dollar stablecoins as a hedge.
As I mentioned above, most of the stablecoins in circulation are on Ethereum, and this is basically because it's the most secure smart contract cryptocurrency out there. While Ethereum’s gas fees are not ideal for individual adoption, Ethereum’s security makes it quite ideal for institutional adoption, including in the context of stablecoin payments. Case and point, it looks as though countries like Russia and Iran are exploring stablecoin payments.
Unfortunately the US isn’t a fan of either of these countries, and that can only mean one thing for any cryptos that they end up leveraging for domestic and international payments…
