The Merge ‘Completely Changes’ Ether’s Investment Case for Institutions

Dubbed the most significant event of this cycle — if not in the history of cryptocurrency — Ethereum’s upcoming Merge is now drawing the attention of industry participants eying the growing potential of institutional investors putting serious capital to work in the digital asset. 

Institutions with environmental, social and governance (ESG) considerations are likely to gravitate toward ether going forward, industry watchers told Blockworks — considering the Ethereum Foundation estimates the blockchain’s energy consumption to decrease by about 99.9% following the Merge.

“The prospect of Ethereum moving to proof-of-stake completely changes the investment case for ether,” Ben Dean, director of digital assets at WisdomTree in Europe, told Blockworks. “We’re certainly seeing more interest than we have in the past with folks turning up and asking questions around staking yields, around ether, around the different technical specifications, but most importantly the investment case.”

WisdomTree launched its physically backed ether fund in Europe in April 2021, drawing interest from hedge funds and family offices. 

But private banks and mid-sized wealth managers, who have been historically hesitant to enter the segment, are now paying close attention to the Merge. Other large investors, such as pension funds and insurance companies, have the most stringent screens for what they can invest in, Dean added.

“They are the ones that are now coming around,” he said. “These are folks who previously kind of categorically said, ‘No,’ without knowledge that the digital asset space has grown and diversified over the last four years and that there are very different investment cases behind different digital assets.”

Jack McDonald, CEO of crypto infrastructure firm PolySign, told Blockworks investors are generally bullish about Ethereum’s transition to proof-of-stake, calling it “a win-win for the industry.”  

“More and more institutional investors are looking to get into the space, and the fewer obstacles that exist  — like energy consumption — the better,” he said.

Pre-Merge inflows, then outflows 

Despite seeing combined negative net flows of about $450 million during the first six months of 2022, ether investment products notched inflows of $138 million in July, according to CoinShares data. 

Inflows into Ethereum products had slowed to roughly $19 million in August, heading into the month’s final week, which signaled investors may prefer to wait for the Merge to occur before adding to positions, CoinShares Research Head James Butterfill previously told Blockworks.

Ethereum products endured net outflows of $62 million last week likely due to “investor jitters over the Merge,” Butterfill said in a Monday CoinShares report. 

Still, the Merge ticks many boxes for investors seeking to invest, particularly from an ESG perspective, the research head has said previously. He added that Ethereum could lead inflows and potential price appreciation towards the end of the year.

While the blockchain’s departure from proof-of-work will likely help convince some investors to gain exposure to ether, the bear market cannot be ignored, according to Milosz Papst, director at investment research consultancy Edison Group.

“It is possible that an acceleration of allocation to ether will materialize only once the macro outlook brightens,” he said.

Additional allocation in the near term may largely come from family offices, high-net-worth individuals and hedge funds, Papst said, while adoption from larger institutional investors — despite Ethereum’s dramatic energy consumption reductions — are likely to progress more slowly.

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