Market Wrap: Ether Falls Despite Merge Anticipation; Bitcoin Climbs as Investors Await Inflation Data

It's Ethereum Merge week, and much of the crypto world is eyeing ether, the second-largest cryptocurrency in market value, as its blockchain protocol moves from a proof-of-work to proof-of-stake consensus mechanism. The shift is expected to occur Thursday between 02:38 UTC and 03:52 UTC.

Where bitcoin’s (BTC) price appears linked to Tuesday’s latest inflation reading and subsequent interest rate actions by the U.S. central bank, ether’s (ETH) price movement appears tied to Merge expectations. Despite the divergent catalysts, BTC and ETH remain highly correlated, with a 30-day correlation coefficient of 0.90. The correlation remains high (0.89) when the measurement is narrowed to 10 days. A reading of at least 0.70 is considered high, while one of 0.30 is considered low.

Economic calendar: The British economy grew at a slower pace than expected, with July GDP of 2.3% growth versus expectations of 2.6%. The figure was an improvement over last month’s 1.9% growth rate.

Investors’ attention will shift to Tuesday’s U.S. inflation data. The consensus estimate of analysts projects an 8.5% increase in prices while “core inflation,” which excludes food and energy costs, is expected to be 5.9%. The Federal Open Market Committee (FOMC) will be examining inflation data to determine whether to accelerate or slow its pace of interest rate hikes.

U.S. equities: Traditional equities markets were higher. The Dow Jones Industrial Average (DJIA), S&P 500 and tech-heavy Nasdaq composite indexes recently rose 0.7%, 1% and 1.2%, respectively.

Commodities: In energy markets, natural gas rose 4.9% in price, while crude oil was 1.4% higher. Copper, often viewed as a barometer for overall economic activity, rose 1.2%. Traditional inflation hedge gold increased in price by 0.5%

The Dollar Index (DXY), which maintains an inverse relationship to BTC prices, declined 0.57%. Its correlation coefficient relative to bitcoin is -0.9.

Altcoins were higher. Polkadot’s DOT rose 0.3% and Avalanche (AVAX) and Solana (SOL) increased 4% and 6%, respectively.

ETH Markets Appear Cautious Ahead of Merge

In what may just be “pre-Merge” jitters, ETH sold off relative to BTC on higher-than-average volume on Monday. As volume can often communicate the level of conviction behind an asset’s price movement, the ETH/BTC pair traded at double its normal volume.

Ethereum’s move from a proof-of-work consensus mechanism to the more energy-efficient proof-of-stake protocol is the most significant recent development for ether, its currency. In addition to the reduction in energy consumption, proof-of-stake will potentially have a deflationary impact on ETH supply.

The relevance to ETH holders is that a decrease in ETH’s supply should lead to an increase in ETH’s value. The 40% increase in ETH relative to BTC because July indicates optimism leading to the Merge, while the 9.2% decrease since Sept. 8 implies a degree of caution directly ahead of it.

The below chart highlights the recent decline, along with a decline in the Relative Strength Indicator for ETH/BTC from 75.7 to 41.4 in recent days. RSI is a technical indicator that measures price momentum. Values above 70 imply that an asset is overvalued, while values under 30 imply that an asset is undervalued. The 41.4 reading is neutral.

ETH’s RSI relative to the USD is 57, less neutral than the ETH/BTC pair, but also not ringing overbought alarms.

ETH funding rates are negative, implying bearish sentiment. Funding rates are payments between buyers and sellers of futures contracts. When rates are positive, buyers (longs) of contracts pay sellers (shorts). When rates are negative, the opposite occurs.

ETH funding rates were positive each day between May 1 and Aug.14, and negative for every day but five since then. According to data from the FTX exchange, the average annualized 30-day funding rate for ETH is -12.16%, while the average annualized funding rate over 90 days is currently -5.65%. By comparison, ETH’s all-time funding rate is 13.03%.

Investors, particularly on the institutional side, could be waiting for the results of the Merge prior to allocating more capital. Additionally, recent on-chain data shows a slight increase in ETH being sent to exchanges. An increase in assets deposited on exchanges can often be a precursor to additional selling.

Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive and standardized classification system for digital assets. The CoinDesk Market Index (CMI) is a broad-based index designed to measure the market capitalization weighted performance of the digital asset market subject to minimum trading and exchange eligibility requirements.