By Marcus Sotiriou, Analyst at the publicly listed digital asset broker GlobalBlock (TSXV:BLOK).
Bitcoin started trading above $22,000 on Monday morning, ahead of the critical U.S. CPI release on Tuesday, as well as the highly anticipated Ethereum merge, which is due to take place in the coming days.
The Merge is, by far, the most impactful event that has happened in the crypto industry thus far and is seen as a very positive event by most crypto investors. It will bring notable changes to Ethereum, as it will result in a transition from Proof of Work to Proof of Stake, which leads to a reduction in the network’s energy usage and new token issuance.
However, there are significant risks involved that could make the event messy in the short term. For example, many people in the ecosystem may not be ready to process the new chain, as they have not updated their software. Also, some of the APIs could break in ways which many people cannot predict. Furthermore, there could be another delay which would frustrate investors who have been waiting years for this transition to occur.
The Merge is such a complex technical event, which is not surrounding just one big company, but a whole decentralised network, so there are reasons why it may not play out so smoothly.
Nevertheless, the long-term implications, in my opinion, will be hugely beneficial for Ethereum the wider crypto space.
This is because the merge will reportedly reduce Ethereum’s energy consumption by around 99.95%. ESG narratives are one of the biggest hurdles for institutional investors entering the crypto industry, and so the Merge could alleviate this concern and improve the reputation of the whole asset class.
ETH investors will also receive a yield of somewhere around 5%. This means that the whole DeFi sector will have a benchmark yield to base yield off, so it could allow the DeFi space to flourish as investors now have a method to price risk. In addition, institutional investors love cash flow, so being able to receive a lucrative yield is another enticing benefit which could make ETH more investable for them.
The reduction in energy usage and yield after the Merge occurs could be a significant catalyst for institutions to enter the crypto space in mass over the next 5 years, but the short-term risks with the transition could mean we have a rocky week ahead.