5 reason why the crypto markets could crash after the Ethereum merge
Don't be the one left holding the bag
I think that the anticipation of the Ethereum merge is the only thing keeping the crypto markets afloat. After the merge I suspect that the bilge pumps will break and the flooded vessel will plunge to the inky depths. Here’s why.
The bullish merge narrative
In two weeks Ethereum will switch from proof of work to proof of stake. There’s already a bottomless pit of articles that describe this event in detail (here’s a good one), so I won’t get into it.
Why is the merge bullish?
Well, there’s some excitement about going green. Proof of stake uses about 99% less electricity than proof of work, so that’s kinda nifty. However, I think financial incentives are the real reason that the market is excited.
The merge is expected to boost the staking yield on Ethereum to 8% or more. That’s due to a portion (about 30%) of the transaction fees which will go to the stakers instead of the miners. However, the expected staking yield is where we start to run into problems…
Why I think the markets could crash after the merge
1 - Nobody is using Ethereum
For stakers to earn their higher yield there must be users paying transaction fees. Unfortunately, network usage is nearing record lows on Ethereum.
The gas fee has been hovering around 5 gwei for the last couple of weeks. During the bull run of 2020 and 2021, gas fees were regularly 100 gwei or more, and it wasn’t out of the question to see a 200 gwei fee (not to mention crazy spikes to 1,000 gwei or more during huge NFT launches). That’s the difference between paying $0.20 for a transaction, versus $18.00 (not exact costs, just ballparking it here).
If nobody is using the network, they’re not paying transaction fees to the stakers and the staking yield will be less than expected. A disappointing staking yield could be a big reason for traders/investors to dump Ethereum after the merge. Market consensus is that the post-merge staking yield should be around 8%, so if it’s only 6% that would be negative event.
2 - Better yields in TradFi
Apart from trusting politicians to do the right thing, investing in crypto is the riskiest thing ever. Given today’s macro environment, why would any institutional investor buy and hold Ethereum for the 6 to 8% yield when US treasuries are yielding 3.2 to 3.5% and some corporate bonds are yielding 8%? I recently took a small stake in Enterprise Products which pays a 7% dividend. Risky, yes, but way less risky than Ethereum.
A 8% yield in Ethereum looked a lot more attractive when inflation was 2%, the 10 year was yielding 1.5% and the world wasn’t going to hell in a handbasket.
3 - Some traders may be holding for a hard fork
The Ethereum miners are threatening a hard fork. There may be a subset of traders who are holding Ethereum just so they can get the forked version of ETH, if it happens. As soon as the merge is over, they’ll have no reason to keep holding ETH and could dump it.
4 - Withdrawals are still not enabled
To earn the staking yield in Ethereum you have to either,
Solo stake which means locking your ETH in the beacon chain for a bare minimum of six months (probably longer)
Use a staking service whereby your derivative staking token can trade below par with ETH. For example, stETH is currently trading at a 3% discount to ETH, and it could easily go lower (a few months ago stETH dipped as low as 8% below par with ETH)
So to capture the ETH yield, which could be lower than expected, not only do you have to expose yourself to extreme volatility, you also have to be OK with indefinite illiquidity! In this environment? Seems like a tough sell…
5 - We’ve run out of narrative
As far as I can tell, the Ethereum merge is the only bullish narrative in all of cryptoland.
Turns out that Bitcoin, the supposed inflation hedge, is not actually an inflation hedge
Governments are cracking down on crypto
The NFT market is in shambles
There is a lack of global liquidity as evidenced by the spiking dollar
A looming recession in Europe and the USA
Rising interest rates and quantitative tightening
What reason in hell is there for the riskiest asset class to rally? We’re entering a period where I think most investors will be more concerned with maintaining their capital than growing it.
Is there a trade?
On the short time frame I personally don’t see a trade. There is too much uncertainty. There is a certain temptation to go long ETH for a fast trade on a runup to the merge, but if the stock market collapses before the merge, crypto will collapse with it.
Shorting ETH is difficult, too. It’s impossible to predict what kind of rally/short squeeze might go down. ETH could easily rally 20 or 30% in a few days, only to crash again.
For me the entire month of September is a write off for crypto. My thesis is looking towards October and beyond. No matter what happens in the next five to six weeks, on a longer time frame I’m expecting a collapse in crypto. This will hopefully give us a fantastic opportunity to fill our long term bags.
Price target?
I think it’s likely that we retest $1k. That could act as support and the bottom is in. However, if we break below $1k we could easily go to $800, $700, $600: pick a shitty number from a hat. I don’t have a crystal ball but I do have cash, ready to scoop ETH after the armageddon. In time a new narrative will blossom and this left for dead asset class will rise from the nuclear crater.
Plan accordingly.