Events aren’t isolated, as with so many other things in life. Any type of event, whether planned or unplanned causes changes in the surrounding environment. Imagine a stone being thrown into a water body, creating ripples and altering the environment. This same thought process can be applied to Ethereum Merge.
The Ethereum blockchain with Ether ( ETH) is a key pillar in the crypto asset market, which has been growing in popularity each year. Ether is second in popularity, with users searching Google for “Ethereum” an average of 2.1million times per month. ETH has risen to a market capitalization of over $100 billion. The Ethereum blockchain is a popular choice for developers who want to build decentralized applications (DApps). According to a survey by Bybit, Ether was the second most commonly used alternative to Bitcoin ( BTC), with one sixth of Americans saying they are familiar with it (15.4%).
The Ethereum Merge or simply the Merge fundamentally alters the Ethereum blockchain to achieve greater security and scalability while using less energy. This could have ripple effects on the wider crypto industry.
What is the Merge?
The Merge is part a multi-year transition plan for Ethereum blockchain. Sometimes referred to as Ethereum 2.0, it’s essentially a multiyear transition. The larger transition is intended to scale up the Ethereum blockchain. The official beginning point of the network’s transition was in late 2020 when the Beacon Chain (a proof-of–stake (PoS version) of Ethereum) launched. However, Ethereum’s main proof–of-work (PoW blockchain) continued to function.
The Merge is expected to take place on September 15. This basically marks the end of the PoW chain and all future efforts will be focused on the PoS network. The long-running debate between PoW and PoS is a common one in the crypto and blockchain industry. PoS blockchains are more energy-efficient than PoW networks, which is a part of the argument mix.
What will Ethereum and crypto generally look like after Merge?
The Merge will make Ethereum a PoS blockchain. The difficulty bomb will lower mining rewards making it unattractive to mine on the chain. There has been discussion about miners resisting this change. The main Ethereum blockchain will continue to be the PoW one without miners.
After Merge, Ethereum will use validators to manage the blockchain. To support the function of the blockchain, validators will need to lock up 32 ETH and earn rewards. There are other ways to contribute to the network via stake, such as services provided by crypto exchanges.
The Merge does not mark the end of Ethereum’s wider transitional journey. According to Vitalik Buterin, co-founder of Ethereum, the Merge marks only half way in Ethereum’s transition. It is 55% closer to completion. The next goal of Ethereum is Sharding, which will improve scalability by dividing the blockchain into parallel sections.
The Merge is not as simple as it seems.
There are some common myths surrounding the Merge. One misconception was that Ethereum would suddenly become faster and charge lower transaction fees. However, this is unlikely to happen immediately.
Some have also wondered if the Merge would lead to a flood untaken ETH on the market. This is not the case. Staked ETH will remain locked up until the Shanghai upgrade in 2023.
Related: Armstrong and Buterin reflect on the proof-of-stake shift in Ethereum Merge as Buterin nears
Thirdly, there are some price-action experts who believe it will be easier to predict. They either suggest that ETH’s value will rise due to the upgrade, or argue that it will become a “sell news” event, which results in ETH’s price falling. This tactic is based on market psychology. The asset may rise in price if everyone is excited about an upcoming event. Prices could drop if the event is not as anticipated or climactic.
Like many other events in crypto, traders seek to profit from competing predictions. The downside to this prediction is the already negative price action in crypto, making it difficult to predict the future.
Merge: Possible trading strategies
If you want to take advantage of bullish investor sentiment before the Merge, regular ETH can be a viable option. If you have sufficient funds, you may even consider holding 32 ETH to become a validator. This will allow you to earn around 4% annually. This number will rise to approximately 7% after the Merge.
Your assets will still work for you even if the price does not rise quickly enough to earn a 1,000% return. Keep in mind that your 32 Ethereum will be locked until the Shanghai upgrade in 2023.
A second strategy is to use futures contracts to shorten your position. This can be used to hedge your spot ETH. It all depends on how good you are at “timing the market”, but a small portion of your portfolio might be sufficient to offset any short-term losses that you may experience with your spot holdings. You may lose your futures contract bets if the market moves up. However, your spot portfolio could be sufficient to offset these losses if you decide to sell.
An alternative is to “sit in stablecoins” if you are concerned about the volatility of the market. If you aren’t sure of the future direction of the market, this is an acceptable option. You can capitalize on extreme movements when it breaks out, which it will. You may consider going long if the price of ETH falls to $880, which it did in June. You can also opt to go short if the price of ETH explodes to ridiculous heights.
No matter what you do, remember that most active traders lose their majority of their money. You have the best chance of succeeding if you choose a price point and make your purchase. Then, forget about it until market conditions improve.
Find out if your central exchange will allow airdropped Ethereum to be made available
The Merge will be handled differently by centralized exchanges. Most users will be interested in the decision of their exchanges whether they give them their “airdropped” Ethereum.
If some blockchain participants continue operating the proof–of-work chain Ethereum holders will suddenly own two sets of their ETH tokens: one set on proof-of–stake and one set upon proof-of–work. Bybit and other exchanges have stated that they will support both chains, so users can sell or withdraw tokens. Coinbase and Binance, however, have not made the same commitment. Users can also make sure they have access to their ETH by keeping their wallets in their own custody.
The blockchain may not recognize tokens if they are kept in financial protocols that are complicated. This includes liquidity pools and lending protocols. If users want their ETH to be recognized, they may wish to withdraw it from these protocols a few days before the Merge.
The Merge will also cause downtime. Most exchanges plan to stop withdrawals and deposits of ETH and tokens from its blockchain, known as ERC-20 tokens. This will take effect on September 14. The majority of exchanges plan to restore these activities by Sept. 16, although the date may change due to unforeseeable technical issues.
DApp users will also benefit
The blockchain and crypto industry are interconnected in a huge way. According to State of the DApps, Ethereum hosts nearly 3,000 DApps. The high Ethereum fees in 2021 is one example of Ethereum’s impact on the overall crypto sector. This may have discouraged some DApp users.
The Merge could affect DApp users, ETH Transactors, and many others, but it is more important as part of the larger scheme of Ethereum 2.0. The Merge is an integral part of the larger Ethereum transition. It aims to increase security, scalability and reduce energy consumption. While the Merge is expected to have a significant effect on the energy needed to run Ethereum’s blockchain , operation may be a little slower . However, other benefits might take longer because of the larger transition .
ETH has no maximum coin supply. However, it does have a cap on the number of new ETH that can be created each year. Ethereum Improvement Proposal established an Ethereum burning mechanism that is based on transactions. However, the Ethereum blockchain can also produce new ETH. The Merge will reduce the amount of new Ethereum created each year, potentially affecting market activity.
These opinions are solely the author’s and do not necessarily reflect those of Cointelegraph. This article is intended for informational purposes only and should not be construed as investment or legal advice.