Ethereum (ETH) price is trading lower this week following yesterday’s hotter-than-expected U.S. CPI report for August. Cryptocurrency investors have all eyes set on today when the much-anticipated migration from Proof-of-Work (PoW) to Proof-of-Stake (PoS) is scheduled to take place, the event also known as the “Merge.”
Looking at the data, the world’s second-largest cryptocurrency is facing an increasing number of short positions in the derivatives market as investors seek to mitigate risk ahead of the long-awaited Merge event.
The funding rates of Bitcoin and Ether perpetual futures contracts significantly deviated last weekend, with Ether’s funding rate hitting its lowest point in over a year, Kaiko’s data shows.
While the Merge is a highly-anticipated development in the crypto world, a surge in the number of short positions in Ether could be as investors look to hedge risks as ETH price has largely appreciated in the past weeks while funding rates, on the other hand, have slumped.
“With the Merge happening this week, it could be that folks are hedging as the price of ETH has mostly increased while funding rates have gone negative,” said Andrew Tu, head of growth at the crypto trading firm Efficient Frontier.
Ethereum price is down almost 9% this week to trade near $1,600 just a few days after testing the $2,000 handle.
Why Is The Merge That Important?
Dubbed by many as the most important crypto event in the last decade, the Merge is expected to reduce Ethereum’s carbon emissions by 99% and thereby address one of the blockchain’s main critiques. It will also stop the blockchain from relying on miners and allow users to stake ETH in order to become the so-called ‘validators’. Like miners, validators will also be responsible for validating the blockchain’s transactions and safeguarding its security.
Overall, the migration is expected to significantly improve the blockchain’s security and make it greener. The current PoW model allows miners to boost their chances of success “by investing in more powerful hardware, creating conditions for an arms race with miners acquiring increasingly power-hungry mining equipment.”
On the other hand, the upcoming PoS model will enable validators to use their personal ETH holdings as collateral, and their “staked ETH [ether] can be destroyed if the validator misbehaves, with more severe penalties for more nefarious actions,” a post on Ethereum.org explains.
As such, the PoS system is expected to encourage active and honest efforts to protect the network with substantially lower energy costs. The different types of Ethereum wallets will continue to remain available, into the Ethereum 2.0 upgrade - though with some changes on the back-end.
The transition will also make the entry easier for Ethereum users as they will only need to load three programs and stake their own ETH to trigger the validator software, which is expected to make the validation process “more decentralized,” said Lin William Cong, a director of FinTech at Cornell Initiative.
According to research from The Tokenist, what’s even more important is Merge’s impact on Ethereum’s energy efficiency. Many crypto proponents and investors today are not aware of how much electricity is spent in mining and transactions - but institutional investors are.
As of September 13, Ethereum’s annual energy consumption is similar to what the entire country of Chile spends, while its carbon footprint is comparable to Finland’s. Further, a single Ethereum transaction spends enough energy to power an average U.S. household for more than 7 days. Cong believes that the impact on energy efficiency is the most exciting part of Ethereum 2.0.
Bank of America strategists believe the new PoS mechanism could increase institutional adoption.
“The significant reduction in energy consumption post-Merge may enable some institutional investors to purchase the token that were previously prohibited from purchasing tokens that run on blockchains leveraging proof of work (PoW) consensus mechanisms,” said strategists Alkesh Shah and Andrew Moss.
That would allow investors to generate high-quality yields as validators instead of profiting from "black-box lending/borrowing applications."
At the same time, some crypto investors believe the Merge will facilitate another leg lower for Ethereum price. This would mean that the move higher from June to August was the result of “buy the rumor” while the ongoing sell-off just before the event, as well as afterward, would be “sell-the-news.”
Ethereum price reached its all-time high of $4,866 in November in 2021.
Ethereum’s much-anticipated migration from PoW to PoS is due to take place tomorrow. In the meantime, the ETH price is taking a beating in response to worsening sentiment toward risk assets.
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