What will happen to the price of ETH after the Ethereum 2.0 merger?

chart shows increase in ether issuance relative to validators staking

Key facts:
  • Conditions for long-term investors will be more favorable, says analyst.

  • Traders could find increased demand in the ETH market.

The Ethereum network is close to completing its move to its new version, called Ethereum 2.0 or consensus layer. On a technical level, this will bring many momentous changes, but it is also important what happens to the native cryptocurrency, ether (ETH) after the merger of the new blockchain with the old one.

It is true that it is very difficult to predict with certainty what will happen. However, guesses can be made based on arguments already available. Tom Dunleavy, research analyst at cryptocurrency analytics firm Messari, published an article on the company blog and a thread on the social network Twitter in which lists various factors that can alter the market price of ETH.

First, it highlights “fundamental improvements” that will attract more long-term investors. Between them, underlines the 90% reduction in the issuance of the cryptocurrency.

As explained in previous CriptoNoticias articles, the economic model of Ethereum 2.0 is based on complementing this emission with the burning of 70% of the commissions that are paid online. Both factors would lead to the ethers in circulation being reduced over time, so the asset would be much more scarce.

chart shows increase in ether issuance relative to validators staking
ETH issuance (vertical axis) will decrease as more cryptoactive staking is added (horizontal axis). Font: Roadmap/ Ethereum 2.0

On the other hand, the analyst also points to the fact that Ethereum will become a more environmentally friendly protocol. As the analyst affirms, this is something that pleases institutional investors. Furthermore, it could help regulators take a more positive look at it and could even increase the visibility of cryptocurrency in the public eye.

The lower environmental impact of Ethereum 2.0 has to do with changing the consensus algorithm used to validate new blocks. Instead of using proof of work (proof of work or PoW) Proof of Stake (Proof-of-Stake or PoS). In short, This method requires much less computational resources. which translates into a substantially lower energy expenditure.

Finally, another factor pointed out by Dunleavy is the access to an interest rate of 7% to 13% by staking the ETH cryptocurrency. Validators will have two options for this: own their own 32 ETH to use their node as a validator or use a staking pool to combine their funds with those of other users. In both cases, of course, the interest generated will be different.

Ether after the merger for short-term traders

The above factors can affect the market value of ether. With the entry of new investors in the ecosystem and the reduction of the issuance, the probability that the crypto-asset increases its value exists.

However, today other points that may interest traders even more, short-term investors seeking to generate returns with regular transactions.

One of them has to do with the miners and their exit from the ecosystem. In the current version of Ethereum, users who mine ETH with their GPUs (graphics cards) are “natural sellers” of the rewards they receive, says Dunleavy. The reason is that this is the way to materialize your income, both to obtain profits and to face operating costs.

However, validators will have lower operating costs, so the selling pressure of ETH would decrease considerably. According to this Messari analyst, sales could drop between USD 20 million and 40 million per day (with an ETH reference value of USD 2,000). Monthly, the number rises to USD 1,000 million.

Currently, the buying pressure is what regulates the price of Ethereum to compensate for the sales. After the merger, that balance would be broken in favor of demand, which could result in an increase in the market value of ETH, according to Dunleavy.

The long-awaited merger would arrive in the coming months

For all the changes mentioned, the expectation for the arrival of Ethereum 2.0 is important. According to the developers, the merger (The Merge) of the two chains would take place in the second half of 2022.

In the meantime, tests of the transition are carried out in test networks. Until the moment of the merger arrives and surely after, both the experts and the markets will closely follow everything that happens with Ethereum 2.0.

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