Analysts give their take on the impact of delaying the Ethereum merger

The launch of Ethereum 2.0, or Eth2, involves a move from Proof-of-Work to Proof-of-Stake that will rumoredly turn Ether (ETH) into a deflationary asset and revolutionize the entire network. The event has been a trending topic for years, and while anticipation for “The Merge” has been building in recent months, this week Ethereum core developer Tim Beiko got started informed the world: “It will not be June, but probably in the few months after that. No fixed date yet.”

Delays in Ethereum network upgrades are nothing new, and so far the immediate impact on Ether’s price following the revelation has been minimal.

Here’s what several analysts have said about what the merger means for Ethereum and how this latest delay could impact ETH price going forward.

Staking Rewards expects the merger to be a short-term boon

Based on data from Beaconscan, there are currently more than 10.9 million ETH staked on the Beacon chain, offering a gross stake reward of 4.8%. According to a recent report by cryptocurrency data provider Staking Rewards, this staking level offers validators the possibility of a 10.8% net staking return.

The amount currently staked represents 9% of the circulating supply of Ether, but several obstacles, including the inability to withdraw staked Ether or rewards from the Beacon Chain, have limited broader participation.

In the post-merge world, Staking Rewards expects the number of ETH stakes to grow to 20-30 million ETH, which “would result in a net validation (staking) return of 4.2% to 6%.”

While the merger has several benefits for the Ethereum network, including reducing the circulating supply of ETH through burning and staking, some of the network’s main concerns remain a concern.

Chief among these are high transaction costs, usage difficulties, and network congestion, which leave the door open to competing networks offering comparable staking rewards and cheaper transactions to increase their market share.

Hayes advocates Ethereum Bonds

Big events like the merge often morph into a kind of “buy the rumor, sell the news” event in the cryptocurrency space, but several analysts say it would be a mistake to assume this for Ethereum.

According to decentralized finance (DeFi) educator and pseudonymous Twitter user “Korpi,” there are several factors that will change the supply and demand dynamics for Ether post-merger.

The triple halving refers to ETH issuance being reduced by 90% post-merger, a feat that “would require three Bitcoin halvings to achieve an equivalent supply reduction.”

Other bullish factors include a potential increase in staking rewards as stakers also receive the unburned fee income currently going to miners and an increase in institutional demand due to the ability to apply the discounted cash flow model to Ethereum, which is “that what institutional investors need to approve multi-million dollar investments.”

Essentially, after the move to proof-of-stake, institutional investors could view Ethereum as a type of internet bond offering a viable alternative to US Treasuries.

This concept was explained in detail in a recent post titled “Five Ducking Digits” by former BitMEX CEO Arthur Hayes, who explained: “The native rewards paid to validators in the form of ETH-based issuance and network fees for staking ether spent in validator nodes makes ether a bond.”

Hayes provided the chart below that illustrates how much value Ether could lose while investors are still balanced against the US bond market.

ETH/USD breakeven price expressed as a percentage change from a spot price of $3,320. Source: Media

Based on this chart, at a staking rate of 8%, the price of Ether could fall by 32.6% and still be equivalent to a 10-year 2.5%-yielding bond.

With many analysts making long-term Ether price predictions of $10,000 and above, there is potential for many US bond investors to reap returns from ether staking rather than the US bond market, given the institutional infrastructure in place to support this type of Investment is required, is in place and approved.

Related: Ethereum price’s “bullish triangle” puts 4-year highs against Bitcoin within reach

A few ways to trade the merge

On the trading front, the pseudonymous Twitter user “ABTestingAlpha” discussed several ways to trade the merger written down that there will be less selling pressure post-merge as regular sales by proof-of-work miners will cease.

According to ABTestingAlpha, this will likely be a crowded trade on the long side, meaning there will be “a good chunk of momentum traders merging long Ether.”

This will help with incremental price gains, but it’s important to remember that these traders are unlikely to hold Ether for the long term, so it’s important to try and determine when they will sell.

Based on the news of the recent delay, ABTestingAlpha’s merge start would be considered delayed, leaving several possible scenarios open. With the current delay pushing the launch to the second half of 2022, there is a chance that momentum traders will sell their tokens, which could result in a loss of the 75% to 80% gains Ether has made since mid-March Has.

If the lag is extended into 2023, sentiment is likely to be crushed, which will cause momentum traders to sell with some opening short positions. This is the worst case scenario and could result in Ether liquidity flowing into cash and other Layer 1 and Layer 2 protocols.

ABTestingAlpha said:

“Result: Ether sells off and returns all of its profits to the merger, plus another 30-50%.”

At this point, the situation has turned into a waiting game and a test of patience as the official launch of the merge is unknown and the crypto market is notorious for its short attention span.

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The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should do your own research when making a decision.