Ethereum closer to key transformation

Ethereum Merge scheduled on 14-15 September✨

News frenzy has gripped the financial press and the cryptocurrency market in the face of the upcoming transition of the second largest cryptocurrency, Ethereum. According to developers and on-chain data, the event dubbed 'The Merge' will take place as early as between September 14 and 15 which means we are just over 2 days away. Will the Merge prepare and show Ethereum the way to dethrone Bitcoin? Is the euphoria justified?

What is and what will the enigmatic Merge cause?

We can describe Merge as a key change to the Ethereum network's transaction approval model. This will be the first ever such attempt on an existing blockchain by what Merge is seen as risky. Until now, "miners" were responsible for validating transactions on the Ethereum network. After the change, this role will fall to validators and node owners, who will not use energy-intensive hardware to validate transactions. By eliminating miners, the network's energy consumption will drop by up to 99.5%. Even today Ethereum consumes an amount of electricity comparable to New Zealand, but in a few days the amount of energy consumed will be comparable to a thousand households. 

Ethereum is in for a 'Big Bang' ?

Some cryptocurrency miners have been reluctant to accept the fact of the network's transformation and the suspension of the profitable Ether mining process. Therefore, the Ethereum team has created a so-called 'difficulty bomb' that will make it so difficult to mine more Ether that it will become unprofitable for miners causing mining suspensions. Before we witness the Merg, the network will experience a difficulty bomb explosion that will reduce supply by up to 90%. It is due to this that Ether is eventually likely to become a deflationary token whose supply similarly to Bitcoin will be limited, which in turn may indicate a possible supply shock scenario. Let's mention that in the past, halving Bitcoin's supply-limited halvings turned out to be turning points heralding a cryptocurrency bull market. The last halving in May 2020 occurred just five months before the spectacular rally. 

A new contender for the cryptocurrency throne?

Bitcoin's network has recently seen record low investor interest relative to Ethereum, which is also evident in the futures market. The value of Ethereum contracts before the Merge rose above $1 trillion compared to just $250 billion for Bitcoin. Ethereum beat the 'king of cryptocurrencies' even in such an important metric as the number of transactions on the network. Additionally, rising energy bills are hitting the margins of Bitcoin network miners, so their activity has declined. As recently as 2016, Ethereum's capitalization was 20 times smaller than Bitcoin's; today it is only twice as large. Given the number of decentralized applications built on Ethereum, processed smart contracts, Web3 projects and the consolidation of the NFT sector of the OpenSea exchange), we can expect Ethereum to reduce the advantage of the 'king of cryptocurrencies' over time and has the potential to become a showcase of blockchain technology. In 2021, the Ethereum network processed transactions worth a total of $11.6 trillion, beating Visa's score by more than $1 trillion and the Bitcoin network by nearly 250%. The next step for developers after The Merge is expected to be a reduction in network fees known as 'Gas Fees'.

According to KPMG data, investment in the cryptocurrency industry in the first half of the year totaled $14.2 billion, more than half the record 2021 figure. However, looking at the fact that the second half of the year is ahead and capital inflows in previous years were lower the reading looks optimistic. Continued higher capital inflows in a difficult macroeconomic environment are largely in favor of Ethereum and the network's growth. The number of VC, PE and M&A deals in previous years was 660, 663 and 1,583, respectively. In the first half of this year, the number settled above 720, with the largest deals by volume belonging to TradeRepublic (over $1 billion), ConsenSys, FTX and Fireblocks. Source: XTB, KPMG

Institutional buying on the horizon?

Merge will potentially bring closer interest from institutions encouraged by the increasingly strong positioning, deflationary nature and ecology behind Ethereum. Blockchain through platforms like OpenSea continues to build a 'wide moat' effect which makes it difficult for competitors to approach the utility of the network. It seems that the cryptocurrency is favored by the so-called 'network effect' because despite a number of significant drawbacks and limitations that include low network bandwidth and higher internal fees than competitors, Ethereum is still the first choice for blockchain developers and Web 3.0 initiatives. 

It's hard to resist the impression that only a spectacular failure could stop the project from further development and further monopolization of the emerging market. Institutions may feel encouraged by the fact that a spectacular failure is not highly probable today, and a successful 'Merge' may take the burden off Ethereum's shoulders of the risk of a possible technical error, which may herald growing capital inflows. Recall that the cryptocurrency market has recently attracted intense interest from BlackRock and other funds, including Andressen Horowitz, who announced more than $4 billion in investments in the bull market. 

Ethereum chart, H4 interval. The cryptocurrency has again climbed above the 200-session average on the four-hour interval, which illustrates improving sentiment. In July, the price's ascent above this average heralded Ether's rally of almost 100%. Cooled at the RSI level of 57 shows that the euphoric overbought level is still a long way off. The nearest significant resistance is at levels above $2,000, above which Ethereum has failed to hold previously. Short-term support for ETH is provided by the psychological levels of $1,700, which coincide with the SMA200 and the two local peaks of mid-August and early December. A major error during The Merge, however, could pull the token's price back to the vicinity of recent lows, below $1500. Source: xStation5

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