The Ethereum Merge may be a defining moment for crypto as it will be the first time a blockchain changes its consensus mechanism.
With investor enthusiasm increasing ahead of the event, we’ve seen a boost in ETH prices, but also all across the universe of cryptocurrencies.
ETH burst above the $1,700 level to close out last week, sparking a broad market rally that brought the total crypto market cap back above the $1 trillion mark.
ETH held above $1,700 until early Tuesday morning when the bears took back their control and sent prices back to the $1,600 level.
This shows there is still some bearish pressure at higher levels, with some investors possibly liquidating various holdings as their ETH investments move back into profitable territory.
On a bullish note, the Chicago Mercantile Exchange Group (CME) launched options trading on Ether on Monday. This should increase interest in the cryptocurrency, potentially boosting demand and lifting its price.
Indeed, investors already seem to be positioning for The Merge, with spot trading volumes increasing by nearly 20% and futures trading volumes at historical highs. Futures open interest has increased by 52% in the third quarter of 2022 versus the same period in 2021.
ETH dominance has increased to 19.8%, which is notable as the asset has rarely commanded more than 20% of the total cryptocurrency market cap.
At the time of writing, ETH is trading $1,590.95, off by 8% for the day. The Merge is expected in roughly 36 hours. Taking a longer view, ETH is trading 20% below the August 14 high of $2,007.69. It’s also sitting nearly 20% above the August 28 swing low at $1,432.77.
ETH Support 2: $1,250
ETH Support 1: $1,435
ETH Pivot Level: $1,670
ETH Resistance 1: $1,790
ETH Resistance 2: $2,150
Market Fundamentals
As is becoming more prevalent in the crypto markets, price action is largely being driven by fundamentals, including macroeconomic developments.
If there was any doubt about this, we received confirmation today in the form of the pullback in ETH and the broader crypto market. The catalyst had little to do with developments in the blockchain industry and more to do with the latest U.S. Consumer Price Index (CPI) figures.
Data showed core inflation rose 0.6% in August after rising 0.3% in the prior month. The year-on-year rate rose to 6.3% versus 5.9% in July.
This continued inflation nearly guarantees another 75-basis point rate hike from the Federal Reserve when they meet next in November. Furthermore, it is highly indicative of more similar rate hikes as the Fed has said they want to see several month-on-month inflation numbers annualizing to less than 3% before turning less hawkish and thinking about a pause in rate hikes.
The August CPI data shows we are nowhere close to that level.
Ethereum Fundamentals
Given the sharp drop in ETH following the release of the August CPI data, it isn’t too surprising to see some of the fundamentals turn negative as well.
But while data appears bearish overall, when looking at individual metrics, the picture is mixed enough to be almost neutral.
Given the negative macroeconomic picture and sentiment, this neutrality on what’s an overall bearish day seems to be positive, and leaves open the possibility of a post-Merge rally.
The number of unique addresses staking ETH continues to grow, indicating support for The Merge and the move to proof of stake (PoS).
While the 0.73% weekly change might seem small, remember that over the past 52 weeks, the number of unique addresses staking ETH has nearly doubled.
Also notable is the continued growth in the total number of addresses holding ETH.
While the correlation isn’t perfect since an individual can hold more than one address, the growth does indicate an increasing number of investors are holding ETH. This should help bolster demand as investors add to their positions moving forward.
Investor Takeaway
Wednesday’s Merge is one of the biggest, most anticipated events in blockchain history. While a “sell the news” reaction is a possibility, it’s more likely ETH will remain flat or continue its steady climb higher following the market-shaking CPI release that caused Tuesday’s drop in the crypto markets.
It’s worth noting that while stakers can remove any rewards earned during pre-Merge staking, they’re not yet permitted to withdraw their stake, so it’s unlikely we will see mass selling in response to The Merge. Staked withdrawals will not be enabled until the Shanghai upgrade goes live (early 2023), and even then, there will be a withdrawal queue to maintain an orderly market.
One interesting occurrence recently has been the outperformance seen from other proof of work (PoW) blockchains as speculators place bets on where they believe the bulk of the hardware and hashrate currently mining Ethereum will end up. For example, Ethereum Classic has seen a 20% increase over the past several weeks and has doubled relative to Ethereum since July. It’s not certain this behavior or speculation will continue, and if there’s a “sell the news” event, it’s more likely to occur in the PoW coins that have rallied pre-Merge.