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Head of Fixed Income Strategy
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Crypto Weekly: Surging upon progress of the Ethereum merge
Mads Eberhardt
Cryptocurrency Analyst
Summary: Along with the equity market, the crypto market surged in July. The positive sentiment in the equity market was likely a contributing factor to the surge in crypto, as well as the expectations to the forthcoming Ethereum merge. After a successful test in July, we currently assign a 75% chance of the merge occurring in September. And speaking of the equity market, Tesla liquidated the majority of its Bitcoins in the second quarter, putting Bitcoin’s “store-of-value” narrative under pressure.
The anticipation of the Ethereum merge prompts a surge
For the past couple of weeks, the crypto market has been on an upward trajectory. Since local lows of 17,600 (BTCUSD) and 887 (ETHUSD) in mid-June, Bitcoin and Ethereum have surged to 23,200 and 1,670, respectively, amounting to a surge of 31.60% and 91.25% while other minor cryptocurrencies have followed suit. The surge has surely been driven by an enhanced risk-on sentiment originating from particular equities over the past month. However, one might also look at the crypto market itself to find the source of the positive sentiment. In early July, the second existing Ethereum test network known as Sepolia underwent the merge, transitioning from proof-of-work to proof-of-stake without any major issues. Hereby, only one more existing test network called Görli needs to undergo the merge before it is the real deal. Görli is scheduled to be merged around Thursday, August 11. With the Görli test network being the last obstacle before the real merge, Ethereum’s developers say that September 19 has been chosen as a ‘soft’ date for the merge. However, Ethereum Foundation and its developers have categorically been too optimistic with respect to timelines, so this date should be taken with a pinch of salt.
Asking us, at the time of writing, we assign a 75% chance in favor of the Ethereum merge occurring in September. In case the Görli merge occurs flawlessly, this increases to 95%. In plain English, Ethereum is truly close to its transition to proof-of-stake, with the latter likely taking place within the next two months. It seems the market agrees with this view. Based on Ethereum’s price activity in July compared to the one of Bitcoin, traders undoubtedly favor holding Ethereum upon the merge. In our view, the positive sentiment in Ethereum has positively influenced the price actions of the rest of the space, including Bitcoin. For instance, open interest in Ethereum options hit an all-time high last week. The merge is set to reduce the yearly issuance of Ether from 5.5mn Ether to 0.6mn Ether, increasing staking rewards, and lowering the network’s energy consumption by over 99.95%.
It is yet to be seen whether the market can keep this steam until the Ethereum merge. If the Görli merge occurs flawlessly, it might fuel the anticipation of the merge once again. The same can be said in a negative manner if the Görli merge results in severe issues, likely delaying the merge. As the market has extended a high correlation to the equity market in July, particularly to technology stocks, participants in the crypto market should closely watch the sentiment in technology stocks, since it might continue to greatly impact the prices of cryptocurrencies.
Tesla liquidates the majority of its Bitcoin holdings
What might also have contributed to the outperformance of Bitcoin by Ethereum in July was Tesla announcing it has sold the majority of its Bitcoin holdings in the second quarter. Following the company’s Q2 earnings on July 20, Tesla announced it has liquidated Bitcoins worth $936mn. Since the company has earlier liquidated Bitcoins worth around $272mn, it is estimated that Tesla still holds a small amount of around 9,700 Bitcoins from its original purchase worth $1.5bn in 2021. Many crypto advocates were fast to state the positive significance of this liquidation since it means that fewer Bitcoins are held by investors more likely to capitulate, but we disagree with this view. Although the market has already absorbed these Bitcoins short term, it greatly negatively impacts the “store-of-value” narrative of Bitcoin long term when one of the largest companies globally liquidates its Bitcoin holdings. Following the announcement, Tesla said that it might again acquire Bitcoins in the future, should its balance sheet once again enable such a purchase.
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