The Ethereum merge is fast approaching. After many delays, it is now set for September 15. This is a major event for the crypto space, where the world’s 2nd largest cryptocurrency will be switching over from Proof-of-Work consensys mechanism to a Proof-of-Stake consensys mechanism.
The main reason for the merge is to decrease energy usage. According to a claim from the Ethereum Foundation this could be as high as a 99.95% reduction in energy usage for the network.
Due to the various community and market dynamics, this presents five potential trades. Let’s dive in:
1. The News Trade
“Buy on rumors, sell on news.” Believe it or not, this trading adage actually goes back to a man named Joseph De La Vega who wrote a book about markets in 1688 called Confusion de Confusiones.
News traders generally focus on trading in the time leading up to a major news event or immediately after, when the market is still reacting to the news.
The idea is that rumors about a positive news event causes speculators or investors to buy, while the news itself actually results in them selling and taking profits.
A spectacular recent example in recent crypto history is Dogecoin. Doge famously pumped in the meme stock era, going from an opening of $0.004681 on January 1, 2021 to over $0.73 on May 8, 2021. This was a remarkable 16,222% pump.
On May 8, 2021 Elon Musk went on SNL and in fact jokingly pumped Dogecoin multiple times, which of course was widely publicized beforehand.
On April 30, the price opened at $0.3047. On May 8, intraday the price reached $0.7376, a 242% gain in just over a week.
Dogecoin ended the day at $0.64, and just two days later, ended on May 10 at $0.45, a 39% drop just two days after the show.
In this trade, for those who bought near the recent bottom before July 13 under $1,100 this would include taking profits at any time between now and September 15.
As more volatility could be expected right before the merge, those with even more risk appetite could buy more ETH between now and up to 24–48 hours before the merge before taking profits.
2. ETH Long-Term Bearish Trade
This is a trade for those long-term bearish on Ethereum.
Some of the main reasons one could be bearish on:
- The Fed is increasing interest rates to combat inflation, this is generally bearish for risk assets including and especially tech stocks, bitcoin and ether. Eth could continue to drop.
- Those that support Proof-of-Work would be bearish on Ethereum moving to Proof-of-Stake.
- Those that are critical of Proof-of-Stake can point to it historically being less secure than Proof-of-Work.
- Another criticism is that Proof-of-Stake can be more susceptible to being centralized.
- Specific incidents happened recently where Ethereum network products have been censored and users’ assets seized. This includes Tornado Cash and USDC.
- The US SEC has been taking actions targeting ICOs for ERC-20 tokens, such as the recent Dragonchain lawsuit. Any further actions directly by the SEC to target Ethereum itself as a security or more ERC-20 tokens could spook investors and cause a sell-off.
Traders could execute this trade by:
- Sell ETH for BTC
- Sell ETH for USD
- Short ETH
3. ETH Long-Term Bullish Trade
This is a trade for those long-term bullish on Ethereum.
Some of the main reasons one could be bullish:
- Proof-of-Stake uses less energy than Proof-of-Work, up to 99.95% per the Ethereum Foundation.
- Bear markets are a great time to accumulate assets that are expected to grow in the future. Extended bear markets in crypto have been historically followed by strong bull markets.
- If ETH simply reaches its ATH — intraday of $4,891.70 on November 16, 2021, that is a 186% gain for those accumulating ETH at current prices, around $1,709 at this writing.
- Institutions are entering or planning to enter into products on Ethereum. This includes VISA and major banks using Ethereum or products such as USDC, built on its blockchain.
- Ethereum is still very new and continues to have a large and growing developer community building thousands of DApps, cryptocurrencies, NFTs, DeFi and other products are just a few years old, and are still very experimental. The potential for this market to grow and mature is massive.
- Attempts from so-called “Ethereum Killers” have generally been unsuccessful and taking users and developers away from Ethereum. In fact, projects like Solana, Cardano, and Luna have over-promised and under-delivered.
Traders could execute this trade by:
- Buying and holding ETH
- Staking ETH
4. Proof-of-Work ETC Trade
Whether one is bearish or bullish on Ethereum, there is another higher-risk trade that one could take with Ethereum Classic.
Ethereum Classic was the original Ethereum network that was hard-forked in 2016 to reverse the infamous DAO hack, which was well explained here on Investopedia.
Proof-of-Work miners have machines that will be obsolete, unless they swap to a different blockchain on September 15. The most likely target is ETC.
Others who support Proof-of-Work for other reasons than simply profit would have an incentive to move over to ETC, despite its general lack of a large developer base.
Ethereum founder Vitalik Buterin even suggested that if someone doesn’t like Proof-of-Work they should join the Ethereum Classic community.
This could be executed as a short-term “buy the rumor, sell the news” or a longer-term trade. Many traders already have, as shown by these wild price swings, which have already occurred over the past 30 days.
Potential plays would include:
- Mining ETC
- Buying and Selling ETC
- Holding ETC
- Shoring ETC on pumps that hit resistance
5. Proof-of-Work ETHW Trade
There is another alternative for those that have the same reasoning for moving over to ETC.
Again, this is:
- Support of Proof-of-Work
- Following where the miners are going
- Mining
- Speculating on the Ethereum Merge news
This is the riskiest of all plays. There is a potential Ethereum Proof-of-Work fork that would be the largest of all PoW forks. It is unclear if this will even happen or if there will be more than one fork.
What is certain is that at least 7 exchanges are offering users to trade a token called “ETHW IOU”, that can be traded right now and hypothetically would be a real token after the merge.
This could of course be traded short and long-term, bullish or bearish. The greatest risk is that of course there is no guarantee that there will be someone there to close your trade on September 15 if this does not go as expected.
Also, another risk for a PoW blockchain is a 51% attack, where one bad actor could control more than half of the network and commit something called a double spend attack. In other words, defraud the network. Large networks like bitcoin do not have this issue. A much smaller chain has far greater risk.