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Analysts Take Cautious Stance on Ether as London Hard Fork Nears

"The EIP-1559 upgrade is overrated," one trader said.

Aug 4, 2021 at 11:09 a.m. UTC
Updated Sep 14, 2021 at 1:35 p.m. UTC

As the crypto community awaits the supposedly bullish London hard fork on the Ethereum blockchain, some analysts are taking a cautious stance on ether and foresee little price reaction after the upgrade. 

"I don't expect much action in any direction," trader and analyst Alex Kruger said. "The upgrade itself is overrated, and what matters is what happens after."

Ether is the native token of Ethereum's blockchain, which is scheduled to undergo a hard fork, or backward-incompatible upgrade, called "London," on Thursday. The change will implement four proposals, including the Ethereum Improvement Proposal (EIP) 1559 that will activate a mechanism to burn a portion of fees paid to miners. 

Once the upgrade takes effect, it is expected to bring a deflationary asset appeal to ether, possibly drawing more investment demand for the cryptocurrency. That's the popular narrative in the crypto community. "Deflationary ETH upgrade EIP-1559 scheduled. Today's dip is a blessing," Simon Dedic, managing partner at Moonrock Capital, tweeted on Tuesday.

However, while the upgrade will introduce a burn mechanism, the amount of ether destroyed will depend on the actual network usage. In other words, EIP-1559 does not directly influence ether's supply. In that sense, the bullish narrative appears overdone for now, Kruger said. 

Matthew Dibb, chief operations officer and co-founder of Stack Funds, said these types of changes are similar to bitcoin halvings and take time to exert an effect. "Long-term, we believe that ether will see significant price appreciation as a result of this upgrade," Dibb said. "However, we aren't expecting an immediate move in either direction." 

Bitcoin halving refers to a programmed code that reduces the per-block issuance of the cryptocurrency by half every four years. Halving makes bitcoin's monetary policy predictable. The EIP upgrade does the exact opposite.

"It is difficult, however, to predict exactly how much ether will be burnt over time given that the base fee dynamically adjusts according to network activity and demand for block space," CoinDesk's Christine Kim noted

Another source of uncertainty is the impact of EIP-1559 on miner economics and how the community will respond after the upgrade. According to Compass Mining, miners will see their revenue dip by 20% to 30% after the upgrade because part of their fees will be burnt. 

All these things will become apparent over time. Thus, traders may sit on the fence in the short-term – more so as the popular bullish narrative appears to have been priced in, according to Pankaj Balani, CEO of Delta Exchange.

The price of ether doubled to $4,000 in the four weeks to mid-May, decoupling from the then rangebound bitcoin mainly on the back of the belief that the EIP upgrade would reduce ether's supply.  The cryptocurrency charted a record 12-day winning trend from July 21 to Aug. 2, gaining nearly 50%.

"The upcoming upgrade could be a nonevent," Balani said. "The cryptocurrency remains dependent on bitcoin in terms of price action in the short-term." 

The options market seems to agree with Balani. Ether's one-month implied volatility continues its sideways churn, a sign investors don't expect big moves over the next four weeks. 

Ether one-month implied volatility

"The combination of the market running up into technical resistance at a time when the event is happening could indeed translate to a sell-the-fact reaction," Joel Kruger, a currency strategist at LMAX Digital, said. However, setbacks, if any, are likely to be well supported down into the $2,000 area, he said.

Ether daily chart

Ether is currently trading near $2,500, having reached two-month highs above $2,650 on Sunday, CoinDesk 20 data show. The cryptocurrency has declined by 0.12% in the past 24 hours, while bitcoin has lost 1.3%. 

Balani foresees ether rallying to $3,000 if bitcoin manages to secure a foothold above the long-held resistance of $40,000. The biggest cryptocurrency is priced at about $38,250 at press time. 

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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