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The Bull Case For Ethereum

Chris Campbell

Posted June 09, 2022

Chris Campbell

Ethereum is one step closer to The Merge.

Ethereum developers completed another test merge this week, a crucial step in its upcoming upgrade later this year.

The test merge happened on the Ropsten network, a clone of Ethereum’s main network, making it the most significant successful test yet. Recently, Ethereum co-founder Vitalik Buterin suggested that the Merge will happen in August if the tests are successful.

This means that Ethereum 2.0 — where Ethereum will move from proof-of-work to proof-of-stake — is closer than ever.

(Before the main event, however, there will be two more tests on separate test networks — Sepolia and Goerli. If those go well, Ethereum 2.0 will likely happen before Summer’s end.)

The Merge is a Big Deal

It’s a big deal for several reasons.

Not only will it enable faster transactions, it will make Ethereum more scalable and deflationary.

Consider this:

Currently, about 13,200 Ethereum is issued to proof-of-work (PoW) miners every single day.

After the Merge, that issuance rate drops dramatically — to 1,590 Ethereum — as PoW miners are removed from Ethereum.

That’s nearly a 90% drop in issuance, equivalent to THREE Bitcoin halvings, happening all at once.

This also means less inherent sell pressure.

I’ll explain.

Miners to Stakers

Due to overhead costs, Ethereum miners sell an estimated 80% of their daily Ethereum rewards to cover those costs.

Since, as mentioned, daily issuance is 13,200 Ethereum in rewards to PoW miners, 80% of that is 10,560 Ethereum — worth about $19 million.

That’s a lot of sell pressure.

On the other hand, unlike miners, stakers don’t have huge overhead. On average, they sell an estimated 10% of their Ethereum rewards.

Meaning? We’ll likely see a dramatic drop in sell pressure.

But that’s not all…

Meanwhile, thanks to EIP-1559, a protocol change that took place in August 2021, roughly 70% of Ethereum fees are taken out of circulation and burned.

Hal Press of North Rock Digital argues here that this “burn” mechanism also creates buying pressure.

While the fee burn does not directly create buying pressure, says Press, “it does do so indirectly with a high degree of certainty and can be thought of as a stock buyback.”

A good analogy for this, says Press, “is if Apple charged for iPhones in Apple shares instead of fiat currency. After receiving your Apple shares for an iPhone, Apple would then retire 70% of the shares and redistribute the remaining 30% back to existing shareholders as a stock dividend.”

Buy Pressure > Sell Pressure

In short, the Ethereum bulls are betting on one thing:

That, post-merge, the high daily sell pressure will be replaced by immense buy pressure. To sum up the bull case:

Today, with PoW, Ethereum needs millions of dollars of new money each day to keep the price flat. When the Merge happens, all of the sell pressure created by miners will vanish and the opposite will happen: Ethereum will need holders to sell millions of dollars worth of Ethereum to keep the price from going up.

None of this mentions all of the ripple effects of Ethereum becoming cheaper to use and more scalable, either.

“We have seen large moves and supply shocks in crypto before,” says Press, “but I believe the Merge will create the largest and most violent one we have ever seen at scale.”

Chris Campbell
For Altucher Confidential

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