Ether Loses Steam Days Before Merge, Bitcoin Holds Steady

The move to proof-of-stake may not move the market in the way traders had anticipated


Blockworks exclusive art by Axel Rangel


key takeaways

  • Bitcoin is leaving ether in the dust as investors move toward a “sell the event” reaction to the Merge
  • Uncertainty about the Merge’s success and implications weigh on traders as the deadline looms

With the highly-anticipated Ethereum Merge potentially days away, the second largest cryptocurrency has led the charge for outflows as investors question the transition’s chance of success.

Ether lost around 3.5% Monday while bitcoin rallied around 2% to sit comfortably above the $20,000 mark, a level analysts have been watching closely since its dip earlier in the month. With the Merge expected to be completed in the next two and a half days, traders are proceeding with caution. 

So too are institutional investors, who pulled $62 million out of ether products in the week ending Sept. 9, according to data from CoinShares. This makes up almost the total amount of weekly outflows in crypto investments, which came in at $63 million and marked a fifth consecutive week of declines. 

Investors pulling out of ether “perhaps highlights a concern amongst investors that the event might not go as planned,” James Butterfill, investment strategist at CoinShares, wrote in a report Monday. 

The Merge is coming at a particularly tumultuous time for crypto, with Clara Medalie, strategic initiatives and research director at data provider Kaiko, agreeing with Butterfill’s sentiment. 

“Ether has had a very volatile summer in the run-up to the Merge, and 30-day volatility remains at its highest levels since July 2021,” Medalie told Blockworks. “Ether’s volatility has diverged sharply from bitcoin’s, and the spread between the two assets is currently at its widest level in more than a year.” 

Ether trade volumes, both spot and derivatives, surpassed bitcoin volumes multiple times throughout the summer as traders made their predictions ahead of the Merge. Open interest for ether perpetual futures recently broke all time highs as trade volumes soared, Medalie noted. 

“Over the past week, ether funding rates have dipped to their lowest levels in more than a year, which suggests a combination of bearish sentiment and strong hedging by traders in anticipation of any possible issues with the Merge,” Medalie said. “Bitcoin funding rates, on the other hand, recently flipped positive as the asset enjoys a burst of bullish sentiment.” 

Not everyone thinks the Merge is positive for Ethereum

The Merge — touted by proponents as an update that will make transactions faster, safer and less energy intensive — is not seen as an entirely positive move by the industry, Nansen researchers noted in a report Monday. 

“Some have argued that Proof-of-Stake also inherently results in centralization,” researchers wrote in the report. “In light of recent events regarding Tornado Cash, many concerns have been raised with the transition to PoS and the implications of the concentrated stake amongst a few actors.” 

If regulators opt to target any validator that acts maliciously toward the Ethereum network, the entire blockchain’s security and decentralization will be threatened, researchers added. 

Traders will also have an eye on economic data this week. Consumer Price Index data is scheduled to be released Tuesday, and consumer sentiment numbers are expected on Friday. Crypto markets have largely tracked equities in recent months as speculation on inflation and monetary policy continues. 

“This week is massive for crypto and if bitcoin can stay above the $21,000 level and ether hold $1,600, that could pave the way for fresh money to come into the crypto space,” Edward Moya, senior market analyst at Oanda, said in a note Monday. “Many are still skeptical of September crypto rebound, but if price action does not turn south here, momentum traders could trigger a decent move higher.”

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