In this article, we try to answer one of the most frequently asked questions – is Ethereum 2.0 Merge priced?
The Ethereum consolidation is undoubtedly the most anticipated event in the cryptocurrency industry in 2022. Set to take place in September, the forecast also caused a significant increase in the price of ETH, which is up nearly 90% since its June lows.
Many believe this increase is largely due to the merger, and some speculate that the event may already be priced in. But is it really? To get to the heart of this, there are some other questions that need to be answered.
What does “to be priced” mean?
In the world of cryptocurrency trading, the price of an asset is affected by a host of different things. Major improvements to protocols can undoubtedly be a catalyst, whether positive or negative.
For example, there is a prominent and very popular theory that the cryptocurrency market moves in cycles – up and down. Bullish cycles happen when prices are rising, and the community has come to the conclusion that the Bitcoin halving is the positive driver. Why halve?
Well, Bitcoin is the largest cryptocurrency by total market capitalization. At the time of writing, it accounts for roughly 40% of the total market, and usually, when its price moves, so do the rest of the cryptocurrency.
The Bitcoin halving is arguably one of the most important events in the development cycle as it halves the number of BTC miners who receive a reward for adding new blocks to the network. Essentially, this creates a so-called supply shock where there is not enough BTC to meet the current demand, and therefore causes its price to adjust positively.
With this in mind, the Bitcoin halving meant that the market should have reacted to the event before it happened, and therefore, the price should have been adjusted accordingly. This does not usually happen because the price tends to rise after the fact.
This gives us the basic definition of “at a price”. It simply means that a future event has already been reflected by market participants and, therefore, the price is adjusted accordingly.
Consolidation Market Effect
Now, to determine whether or not a merger can be priced, it is also important to understand the market impact in theory.
For those unaware, The Merge is a slang term used to describe Ethereum’s transition from a Proof of Work consensus algorithm to one governed by Proof of Bet. Aside from the technical and governance implications of this, it also has a direct impact on ETH tokens.
At the time of writing, Ethereum is still governed by PoW, which means there are miners who get rewarded for adding blocks to the network and validating transactions. According to ethereum. org, the current ETH issuance is: approximately 13,000 ETH per day for mining rewards and approximately 1,600 ETH per day for rewards
Once the merger takes place, there will be only 1,600 ETH left per day for rewards. This reduces the total ETH issuance by a whopping 90%.
In comparison, halving Bitcoin reduces supply by 50% (as the name indicates). Now, it is also true that BTC halves periodically, but even so, the 90% drop in supply is a massive shift.
It is also important to note that the above numbers are a rough estimate based on the ETH currently wagered – a number that can fluctuate.
Regardless, the fact that there won’t be any release at the execution layer is a massive shift in supply and demand.
Can a merger be priced?
Events that do not have a significant impact on market change can usually be priced in. Include these known events in the project development roadmap. For example, if a cryptocurrency project is expected to partner with a well-known company on a certain date, it is entirely possible for traders to take this into account in their current trades.
However, it is questionable whether something like The Merge can be priced. Remember – there were a lot of people in 2020 who were saying that the price of bitcoin was halving.
Why isn’t it priced? It is impossible or extremely difficult for the majority of the market to determine the future demand for ETH.
The demand for ETH is determined by a number of factors, including development and network activity. The number of people using the network determines how much ETH is required to pay the gas fee. The higher the gas fee, the greater the demand, and that’s just scraping the top of the ice.
Speaking on the matter was Vitalik Buterin himself, who argued that The Merge “is priced not only in terms of market but also in terms of psychological narrative”.
However, there are risks
It’s also important to note that The Merge doesn’t come without its risks. This is arguably the biggest and most significant structural change to a major protocol in the history of cryptocurrency. Although it has been worked on and tested for years, there are inherent technical risks with the transition.
There is also an ongoing debate about whether or not miners will support a potential fork as the resulting string will continue to run under the Proof of Work algorithm.