Is the Ethereum ‘Merge’ Driving This Rally?

Ether (ETH), the second-largest cryptocurrency by market cap, is up 45% over the week, outpacing most other assets you can bet on. There might be an easy explanation here:

Traders are turning bullish as Ethereum’s cadre of developers near the end of a multiyear, hyper-complicated upgrade.

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Nathaniel Whittemore, an influential podcaster and committed industry observer, suggested as much in his latest episode of “The Breakdown.” On Twitter, Discord and all the other places people discuss crypto, there’s a growing acknowledgement that “the Merge” could drive markets.

The market rally began last week, after Ethereum developer Tim Beiko proposed Sept. 19, during an open developer’s call for the network to finally switch from proof-of-work, an energy intensive way to secure blockchains, to the environmentally friendlier proof-of-stake protocol.

The event signals, as Whittemore suggested, a “return of optimism” in crypto markets after a monthslong slog of depressed prices. Moreover, the Merge is filling a “narrative void,” the stories crypto folks can tell others about how this technology is reshaping the world.

Narratives are useful for people to coordinate actions alongside shared beliefs. But they can also be dangerous delusions, like Three Arrows Capital co-founder Su Zhu’s idea of “the supercycle,” the idea that the most recent crypto rally was sustainable.

Countless firms fed capital to Zhu’s hedge fund partly because of that idea, only to see 3AC implode after the crushing reality of several bad trades and a souring market.

There are some reasons for optimism about Ethereum: Namely, the Merge would be the most sophisticated upgrade in the digital asset industry’s 14-year history. It would move ETH to a less environmentally taxing system and improve the functionality of the most-used blockchain. It could also put crypto in the news under a positive light.

Others see structural reasons for how the Merge could catalyze prices. The upgrade is a structural shift in how Ethereum could be used – rewarding holders who stake their assets with the network. The shift could even create Bitcoin-like deflationary pressures that further reward holders. In this scenario, people who are buying ETH now in anticipation may see it more as an investment than a trade.

See also: The 'Merge Trade' Has Begun, Experts Say, as Ether Surges

“There’s going to be virtually no sell pressure when the Merge happens. Everyone who’s staking is locked up, everyone remaining with their money in stETH is holding until it repegs, anyone who had their money on Voyager or Celsius is locked in bankruptcy proceedings for 5-10yrs,” crypto commenter Ethereum Jesus tweeted, referring to the bankruptcy filings of crypto broker Voyager and crypto lender Celsius Network.

As with all narratives, none of this must be true for people to believe or trade. There’s a growing acknowledgement that people could “buy the news” of the Merge in a supreme example of the feedback loops that drive many crypto pumps.

The hope is that a “dump” won't follow. The Merge represents the culmination of years of work, countless brain cycles, nearly immeasurable testnets and ETH’s biggest backer’s commitment to not only improving the network, but also to ensuring it might stand the test of time.

That’s the story people could be buying. It’s important, however, to acknowledge that this event is still a risky trade and that there are long-term regulatory and technological risks crypto faces.

Whittemore began his show discussing how crypto, “alongside every asset class,” is subject to wider macroeconomic forces like the U.S. Federal Reserve’s efforts to tame inflation and a potential recession.

“Crypto is not immune,” Whittemore said, and a “true bull market” likely won’t return until the Fed ends tightening. But in the meantime, it seems like crypto has another narrative.