Last week, we saw the Ethereum merge (The Merge) complete successfully.
This is a landmark event in the history of cryptocurrencies. Ethereum issuance dropped by an order of magnitude, the network became greener, and stakers started to reap real gains.
Given the potential impact of the merger, many have wondered whether this major catalyst has already been priced in (Priced In, which is reflected in the market as it digests the information).
If you look at history as an indicator, it doesn’t.
In fact, we have seen five major Supply Shocks between BTC and ETH in the history of cryptocurrencies:
- 3 Bitcoin Halvings (2012, 2016, 2020)
- Ethereum Beacon Chain (Beacon Chain)
None of these events were priced in when the catalyst happened. Let’s decipher it.
a historical shot
During Bitcoin’s heyday, my colleague Cooper Turley and I wrote an article titled “The Bitcoin Halving: Price Effects and Historical Correlations.” This was the first big hit in our early crypto careers.
This article examines each Bitcoin halving and analyzes its impact on the price before and after the halving.
Here’s the summary:
- Historically, Bitcoin has reached ATH within 12-18 months after halving.
- The duration of each cycle is extended
- Returns are dwindling
At the time, we only had data points for two Bitcoin halvings. Given the small sample size, this is a bold statement. But now, we can fill in the data for Bitcoin’s third halving.
Here is the update table we presented in the article:
- BTC hits ATH almost exactly 18 months after halving
- The cycle is extended (barely)
- diminishing returns
Therefore, our analysis holds.
This underscores the fact that, historically, Bitcoin halvings have never been priced in.
When the cryptocurrency market anticipates a supply shock, the price sees a small advance in advance, and then the asset goes parabolic a few months later as the daily selling pressure on miners diminishes (among other drivers).
Below is the visual receipt.
First Halving – November 28, 2021
Second Halving – July 9, 2016
Third Halving – May 11, 2020
As we can see, none of the halving events are priced in before or at the time of the event.
It’s just an experience of what’s to come.
However, we are talking about ETH right now.
The Bitcoin halving is one of the most popular messages in cryptocurrency. It is set to happen every 4 years. Everyone knew it was coming. Every major player understands this.
Still, crypto markets have been known to have been poor at pricing in these simple (yet important) changes in asset supply and demand dynamics, with daily selling pressure effectively halving every four years or so.
To put it bluntly, the crypto market cannot price in the simplest and most famous supply shock.
As a result, ethereum’s supply and demand catalysts are harder to predict. This is mainly because these upgrades are not scheduled programmatically, but depend on the developer’s schedule (which is usually a roll of the dice).
Regardless, over the past two years, Ethereum has seen two (and now the third) important fundamental catalysts in its supply and demand dynamics as it moves towards the fully envisioned network: the launch of the beacon chain, EIP-1559 implementation and recent merger.
1. Beacon Chain
Beacon Chain was launched on November 4, 2020.
When the Beacon Chain deposit contract opened, the price of ETH was $450.
Since then, its price has climbed above $4000 in seven months as 5M+ ETH is locked in the new PoS chain.
Overall, the gain from the start of the beacon chain to the peak of the cycle is +760%.
The second major catalyst was EIP-1559, which burned around 70% of transaction fees paid to miners.
The EIP was implemented in August 2021, when the price of ETH fell sharply from ATH before May.
Oddly enough, ETH bottomed just as the EIP started entering live testnets in June, and started to rise around the time the EIP was scheduled to go live on mainnet in July.
After implementation, the price of ETH broke the ATH again nearly 3.5 months later, as 1 million ETH was quickly withdrawn from miners and permanently out of the market.
As with all Bitcoin halvings, the beacon chain, and EIP-1559, consolidation is another major fundamental catalyst for supply and demand for cryptoassets.
For context, the merger began testing back in early June of this year. Following Sepolia’s second big test, ETH bounced back sharply from the $800 bottom in early June, reaching almost $2,000 as the mainnet merger date was set in August.
This is actually a pre-hype phase for all of our other catalysts. And as it turns out, ETH is up 50% from the cycle low during this period, while BTC is up just 9%.
Now we are in uncharted waters. Mergers are behind us, and what lies ahead remains a mystery. From historical experience, we should have a pleasant journey.
Unfortunately, with ETH dropping below $1,400 over the weekend, the thesis got off to a rough start.
Data-wise, this can be partly attributed to miners dumping their ETH (and another potential Fed rate hike this week).
Miners dumping their ETH is an open issue and we’ll have to get over it over the next few months to get back into an uptrend pattern, but it will happen.
There’s a bigger problem , though : Macroeconomics is a tough battle.
Now, we have:
- The Fed is raising rates aggressively (another 75bps this week?)
- The ongoing war between Ukraine and Russia and the resulting energy crisis
This poses considerable resistance for cryptocurrencies and risk assets in general. If the world is on fire, it doesn’t matter what happens to the supply and demand dynamics of our magical internet beans. Numbers are not going up.
How do we feel about this?
It’s a tough environment for investors.
On the one hand, the market has historically priced fundamental supply and demand catalysts very poorly. Every other supply and demand catalyst in the history of cryptocurrency has ATHs in the following year.
Merging should make no difference. In fact, given the track record, it would be even more surprising if ETH did not go parabolic in the next 12-18 months. Given the massive impact of this catalyst, it should be a home run.
The only problem is that the world is on fire right now. And how you decide to play the game is where investors make money.
As a perma bull, I’m (naturally) on the side of history: mergers aren’t priced in.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/looking-at-ethereum-merger-based-on-historical-metrics-is-it-priced-now/
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