After 6 years, the Ethereum Merge finally happened today. The world’s second biggest cryptocurrency has officially moved to it’s long touted Proof of Stake consensus mechanism.
The historic upgrade ends the blockchain’s Proof of Work mining to the more energy efficient system, and it’s estimated that this could reduce the Ethereum networks energy requirements by over 99%.
The new consensus mechanism replaces Miners with Validators, who are required to stake a minimum amount of ETH in order to participate in being able to write blocks to the ledger.
The ETH merge is one of the biggest events to happen in crypto for some time, but the question now on the minds of many crypto enthusiasts is what impact this may have on the market. Is volatility inbound, or are we going to have to wait a little while longer to see what ETH will do next?
As Vitalik Buterin announced the completion of the merge on Twitter, much of the conversation has turned to the possible effect of the Merge on the price of ETH.
Consider that Ethereum’s Proof of Stake network has been an ongoing upgrade, initially introduced in 2020 as the Beacon Chain. This allowed potential validators to prepare themselves for PoS by staking a minimum amount of ETH in readiness for the final merge with the mainchain, and this is in fact where the name of the upgrade came from.
Just over 11% of the entire supply of ETH has been staked into validator pools (such as Lido) with stakers unable to withdraw their deposits during this time. Now, with the merge complete, withdrawals finally become possible, and there is a potential for a large amount of ETH to be withdrawn and sold.
It’s certainly true that there’s been wide speculation in fact that this would be the case, and that the Merge, far from being the trigger to new all time highs, would actually be the catalyst for a massive dump.
In fact the chance of a downside movement in the price of ETH is further backed up by data which shows inflows of ETH into exchanges over the last few days have spiked to new levels.
450,000 ETH flowed to Binance from NEXO, and over 288,000 ETH moving to Bitfinex in the last couple of days, a total of $1.2 Billion of ETH moving onto centralised exchanges in just two single transactions!
Then again just because the doors are open, this doesn’t mean a guaranteed stampede for the exit, and in fact, withdrawals are muted by the technical ability to withdraw. Just as there was an activation queue for validators coming in to ETH staking, there is also an exit queue in place, which will limit outflows by validators.
If everyone removed their staked ETH, it would take almost a year for the completion of all of the withdrawals, but this would be a most unlikely scenario.
What is more likely to happen is that Validators may choose to withdraw their earned staking rewards, leaving at least their original stake intact so as to continue benefitting as a Validator.
We’ve seen previously how a great deal of staking rewards earned are routinely withdrawn. In this case of Polygon, for example, the three top stakers, that is Binance Node, Allnodes and Luganodes, who combined accounted for almost a Billion staked MATIC tokens, withdrew 10576685 MATIC out of a total of 10689818 earned rewards.
In other words, the top 3 validators withdrew an aggregated 98.9% of the amount of the rewards they earned. Should a similar scenario play out post-merge, the resulting outflow of capital from ETH could still have a significant effect on the short-term price of Ethereum, although it would obviously have a great deal less impact than if a large number of Validators removed all their tokens and sold them into the market.
At the time of writing, just a few short hours after the Merge event, the ETH chart looks… well, it looks pretty flat on virtually all time periods. RSI and MACD are sitting tightly wound in the middle, and volume is nothing to write home about.
The fact is this week saw a gigantic selloff across pretty much all markets as CPI (Consumer Price Index) data proved almost all of the commentators wrong, with a scorching 8.3% inflation rate reported earlier in the week, way higher than what had been expected. However, this could be said to have already been priced in, and it’s not like crypto enthusiasts didn’t know exactly when the Merge would be completed.
In the last couple of days, the price of ETH has barely moved since this drop, ranging within a tight $100 spread in the run up to the merge.
It really is anyone’s guess as to when the next move will occur, and how volatile the market will be, but one thing is for sure, if buyers don’t step in, there is a good chance that a large amount of ETH which has been sat staked for a while will sell off.
It’s at times like this that you might begin to wish there was a way to protect your ETH from downside volatility, just in case, but still keep yourself in the game should there be a major breakout to the upside. If this sounds familiar, then perhaps you ought to check out Bumper’s crypto price protection protocol.
NB: This information is for entertainment purposes only, and is not financial advice. Always Do Your Own Research.
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