How the Merge will Change Ether’s Supply-Demand Dynamics as Miners Get Phased Out
The upcoming Ethereum Merge is set to cause a shift in the supply-demand dynamics of Ether in both the short and long term. A new study revealed that Ethereum miners have continued to sell an estimated $40 million worth of ETH daily ahead of the Merge. However, the selling pressure is expected to disappear once Ethereum shifts to a proof-of-stake (POS) blockchain. This, combined with several other factors, including the continued lock-up of staked ETH, will lead to a supply shock and likely subsequent price increase for the token.
Miners Favor Fork Over Merge
While the general crypto community has broadly welcomed the Merge, the event scheduled for this month has received significant opposition from ETH miners. Led by a prominent miner Chandler Guo, there has been a belated effort to derail the transition of the Ethereum blockchain.
The opposition has proposed a hard fork of the network to allow a separate copy of the existing ETH mainnet to continue with the proof-of-work model. The new fork (ETH PoW) would primarily see miners continue using their expensive mining equipment, which becomes obsolete in the new proof-of-stake mechanism for Ethereum.
Consequently, post-Merge holders of ETH will switch to the PoS model while simultaneously receiving the ETH PoW version of ETH and forked ERC-20 tokens. The likelihood of receiving ETH PoW tokens for holding spot ETH has significantly influenced market participants. Investors have now turned to market-neutral strategies in the futures market to hedge their bets.
ETH investors have been buying spot ETH and selling futures against it, allowing them to receive ETH PoW without downside price risk. This has led to funding rates reaching a 14-month low and increasing the likelihood of a short squeeze, according to on-chain data aggregator Cryptoquant.
The recent alteration in the futures curve’s form is the best example of the market impact of the spot-futures basis trade. With the Merge date confirmed for September, ETH investors have concentrated their futures sales on the September contracts. However, before the confirmation, they had focused more on the December contracts.
As seen in the chart above, the ETH calendar spreads trade in contango (positive slope) most of the time due to funding costs. However, the curve has twisted into backwardation (negatively slope) due to the amount of selling in the less liquid longer-dated contracts. Nonetheless, how long the curvature will keep this shape is unknown. But, given the current spot price of ETH and the Merge happening this month, it’s probable that this may be temporary.
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Market Rooting for a Successful Merge
The cryptocurrency community has continued to root for a successful Merge, with exchanges already opting for the PoS network post-merge. OpenSea, Coinbase, Binance, Circle, and Tether have all announced they plan to support ETH 2.0. Consequently, the support for the PoS ETH has raised concerns that the ETH PoW may not be successful in the long run.
With the entire market focused on the Merge and expecting a smooth transition, Ethereum has continued to perform strongly. Its performance has seen its futures open interest surpass BTC’s for the first time while outperforming Bitcoin in price.
Market players have been hesitant to redeploy cash into risk assets since the Q2 2022 sell-off. They continue to await a more steady interest rate outlook before dipping their toes back into the market. Instead, they are employing Options strategies to communicate their opinions on the Merge while limiting their exposure to the downside. The result has been a spike in open interest for ETH.
Overall, Bitcoin has been somewhat neglected, with the entire focus of market participants now focus on the upcoming Merge. Investors hope the upcoming Merge will move Ethereum from flat and oversupplied to significantly undersupplied. This would boost ETH’s price in both the short and long term.
Do you think the Merge will change the supply-demand dynamics for Ethereum and cause a price surge? Let us know your thoughts in the comments below.