One of the most eagerly awaited events in the crypto industry this year — perhaps maybe never — has begun. Just looking at the market will tell you.
On Tuesday, ether prices outperformed as Ethereum completed the first critical stage in "The Merge," a major update to the blockchain network that underlies the world's second-largest cryptocurrency.
The update will reduce Ethereum's carbon footprint by rendering "crypto mining" obsolete while also introducing new avenues for investors to generate income. It's a decision that will almost certainly have repercussions in the stock market, from trading site Coinbase Global to chipmaker Nvidia, which has previously supplied mining equipment.
The Merge has officially begun, with crypto intelligence firm Messari announcing that the Bellatrix update to the Beacon Chain has arrived, paving the way for the final "Paris" upgrade, which is expected around September 15, to complete the process. The Beacon Chain governs Ethereum's new "proof of stake" system, which is replacing the previous "proof of work" system employed by Bitcoin.
The Bellatrix update gets the Beacon Chain ready to unite with the main network later this month, completing Ethereum's move to proof of stake. This approach will maintain the blockchain's integrity and operations without using the massive quantities of energy necessary for proof of work, instead relying on crypto "validators" who place tokens as collateral and earn yield in return.
It's a major thing, but for the time being, only Ether appears to be paying attention to the early events. Ether's price has risen 5% in the last 24 hours to $1,650, while Bitcoin, its bigger peer, has remained steady.
Nobody knows if this outperformance will continue, but it's nothing new. Since the trough of a crypto market selloff in mid-June, Ether has surpassed Bitcoin by more than 50%, while its larger competitor has stalled.
Traders competing for position in the cryptocurrency futures market appear to be driving a positive attitude. 75% of all option contracts set to expire after the network upgrade is projected to be finished are call options, which are wagers on the price rising.
There does remain a firm minority of bears betting on a Merge flop, in which technical aspects of the process fail or staking tokens fail to become popular. There is no doubt that prices would likely suffer in this situation.
"A lot can go wrong with innovative technology," said Mike McGlone, a strategist at Bloomberg Intelligence, in a note. "Speed bumps in the road should be expected...but Ether is unlikely to halt the revolution in banking and markets, but rather to accelerate it."
Indeed, McGlone sees a future in which Ether's continuing outperformance might serve as a model for other digital assets, a divergence from Bitcoin's present market domination.
"How the No. 2 crypto breaks out of its $1,000 to $2,000 cage could give insight for risk assets and cryptos," McGlone said. "We believe that $1,000 support will outlast $2,000 opposition."
The good news for Ether bulls is that history appears to be on Ethereum's side — even though the Merge is a one-of-a-kind development.
According to Citi analysts, Ether has gained in the 50 days after past big network improvements, indicating good price performance after three of four upgrades.
"Of course, these are events that were technically successful, and we are implicitly presuming any Merge does not have technical challenges," they explained, noting that Ether has previously benefited from a generally robust crypto market.
It's also difficult to say how much of the Merge has already been baked into the current increase in Ether prices, implying that the upside in the case of a successful upgrade might be limited.
"Given the excellent pre-event performance and Google search research indicating historically high searches, we believe a successful Merge is widely expected by the market," Citi analysts said.
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