Buy the rumour, sell the news. 

The Ethereum Merge was completed without a hitch, but prices in the immediate aftermath have disappointed investors. I dive in quickly here to take a temperature check on all things on-chain.

Funding rate turns positive 

In the run-up to the Merge, funding rates on Ethereum hit all-time lows. This caused headlines but was to be expected. With holders of Ethereum receiving an ETH PoW token, it meant investors moved to long spot ETH and short futures in order to receive the token while removing price exposure.

Given this was an apparent arbitrage opportunity, the laws of simple market dynamics dictate that the funding rate has to come down to reflect the outsized number of investors shorting ETH futures into the Merge in order to long spot and receive the ETH PoW token.

Post-Merge, the all-time low funding rates have now reverted to normal levels – and even turned slightly positive. So, nothing to see here and normal service resumed.

Why did Ethereum fall post-Merge?

As I ate my breakfast Wednesday morning (toast and a croissant with honey), Ethereum completed its Merge – at block 15,337,393, to be precise.

The price of ETH traded at around $1,598 and jumped slightly to $1,620, a rise of 1.4%. However, it then pulled back and as I write this over my breakfast on Friday morning (this time oats and blueberries) ETH is trading at $1,470, 8% below the level of the Merge.

 And so, the Merge turned out to be a classic sell-the-news event. Given Bitcoin is only trading 2% below the level it was at as the Merge completed, there does seem to be some underperformance from ETH.

Options also give a hint at the bearish sentiment. There was a volatility smile with a bearish divergence visible in the run-up to the ETH. This means that when the strike price was plotted against implied volatility, there was greater implied volatility (of over 100%) at lower strike prices – showing traders were betting on a sell-the-news scenario.

Looking at options open interest by strike price, there were also more puts than calls – meaning traders were betting on the price falling rather than rising.

Federal Reserve will ultimately dictate price

Of course, all this will be overshadowed by the key Federal Reserve meeting being held on September 20^th and 21^st, when the Fed is expected to announce another substantial rate hike following the disappointing inflation reading this week.

Nonetheless, it hammers home the point that simply because there is a large event in the pipeline does not mean the price will rise. It’s an absolutely classic example of a buy-the-rumour, sell-the-news event, one we see in the stock market all the time.

Having said that, in terms of Ethereum’s long-term future, the Merge is now in the past and it went by smoothly. It’s a huge achievement and very bullish for Ethereum overall. Jerome Powell and the economy just need to cooperate now!

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We’re in a post-merge world. And the SEC is looking at Ethereum once again after the substantial changes it recently went through. Word on the street is that Chairman Gary Gensler, speaking post-merge for the first time, insinuated Ethereum could now be a security. What did Gensler say, exactly? What is a security? Is the SEC onto something by targeting the post-merge Ethereum?

On the one hand, Ethereum’s mining could’ve been the element that kept the organization out of the unregistered security category. Post-merge, there’s no mining and there’s still the issue of the huge premine at Ethereum’s beginning. On the other hand, we could say that the miner’s replacements, the validators, are not getting dividends. The reward is compensation for their work. Under that lens, staking wouldn’t be an investment of any kind. 

Years ago, the SEC said that Ethereum is a commodity and not a security. The changes were substantial, however. ETH is a whole different animal post-merge. Does the Securities and Exchange Commission’s Chairman Gary Gensler sees it as a target? Or are people reading too much into his words?

What Did Chairman Gensler Say About A Post-Merge Ethereum 

Nothing, actually. His statements were about cryptocurrencies in general. However, after a congressional hearing, Gensler told reporters: 

“From the coin’s perspective…that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others.”

What is the Howey test, though? According to Investopedia, the Howey test refers to “four criteria to determine whether an investment contract exists.” The Supreme Court established them by ruling in “SEC v. W.J. Howey Co.” in 1946. The criteria are:

1. An investment of money
2. In a common enterprise
3. With the expectation of profit
4. To be derived from the efforts of others

So, that’s what Chairman Gensler is referring to in his post-congressional hearing soundbite. Was he talking about Ethereum specifically? Is the post-merge Ethereum a security? According to Gabor Gurbacs, Strategy Advisor at VanEck among other things, it’s not about that. Even if it’s not a security, Ethereum was bound to attract regulatory attention post-merge.

To be clear, I am not saying that ETH is necessarily a security because of its proof model, but regulators do talk about staking in the context of dividends which if one feature of what securities laws call a “common enterprise”. There are other factors in the Howey test too.

— Gabor Gurbacs (@gaborgurbacs) September 15, 2022

And Ethereum might very well be a security, according to Gurbacs:

“I am not saying that ETH is necessarily a security because of its proof model, but regulators do talk about staking in the context of dividends which if one feature of what securities laws call a “common enterprise”. There are other factors in the Howey test too.”

ETH price chart for 09/16/2022 on Gemini | Source: ETH/USD on TradingView.com

Is Staking Similar To… Lending?

The WSJ contextualized a tiny but very telling phrase by Chairman Gensler:

“If an intermediary such as a crypto exchange offers staking services to its customers, Mr. Gensler said, it “looks very similar—with some changes of labeling—to lending.”

Does it, though? It seems like a stretch at first hearing, but… the staker lends its ETH to the exchange and gets dividends in return? Maybe there’s a case to be made against the post-merge Ethereum. That’s not what professor, investor, and marketing/strategy executive Adam Cochran thinks, though. “At first brush, the idea of “buy token, stake token, earn token” can look like a security – I get that,” he concludes after a compelling and elaborate thread. 

“But, with a nuanced understanding of the operation of a proof-of-stake chain, I think it fails to be a security even in a generous reading of the Howey test.

If the SEC were to argue that Ethereum is a security, I personally don’t see that view being made *more* likely by the switch to proof of stake, and I certainly don’t think anyone has grounds to state it as such definitively.”

42/43

If the SEC were to argue that Ethereum is a security, I personally don’t see that view being made *more* likely by the switch to proof of stake, and I certainly don’t think anyone has grounds to state it as such definitively.

— Adam Cochran (adamscochran.eth) (@adamscochran) July 24, 2022

To add to the pile, Gurbacs, who made an argument for the Ethereum-is-a-security case, had this to say as a conclusion:

“I believe that computer programs that are not used to raise money or promise dividends should not be categorized as a security. Tokens and small businesses need a lighter and cheaper regulatory regime so that they can register. The current system is complex & cost prohibitive.”

Is that the way forward?

Featured Image by Лечение Наркомании from Pixabay | Charts by TradingView

In what appears to be an instance of buy the rumor, sell the news in crypto, ether is falling the morning after Ethereum completed its long-anticipated Merge at 2:42 am EST.

After surging nearly 3% immediately following the network completing its transition from an energy-intensive proof-of-work system for processing transactions to a proof-of-stake setup that will virtually eliminate its carbon footprint, the asset is down approximately 0.8% over the past 24 hours, trading at $1,589.70.

This move is not surprising as crypto has a history of selling off big news and ether had surged more than 30% in the runup to The Merge as it became more likely. There was also a recent surge of ether deposits onto crypto exchanges, according to data from Glassnode. A rush in deposits is usually a bearish signal, as long-term holders prefer to have their assets off exchanges and in the safety of direct custody. However, part of this surge could be due to ether holders anticipating the receipt of free tokens from an expected splinter of Ethereum, referred to as ETHPoW, which aims to continue a version of Ethereum with its proof-of-work setup. Anyone who owned ether at the time of the split would be eligible to receive these free tokens., Given questions about ETHPoW’s long-term viability, many recipients could be looking to sell immediately after receipt. The easiest way to do this would be by receiving them directly on exchanges that plan to list the token.

Other recent examples include bitcoin reaching highs just short of $70,000 twice in 2021, first in April when Coinbase went public via a direct listing on the New York Stock Exchange and then again in the fall when the CME GroupCME
listed the first bitcoin futures ETF, the ProShares BitcoinBTC
Strategy ETF.

Ether is also trailing most major competitors, including solana, cardano, algorand, avalanche, and polkadot this morning, though all are down following the transition. These proof-of-stake tokens are those most threatened by Ethereum’s completion of The Merge, which not only places it on par with their respective platforms in terms of their carbon footprints but also because Ethereum’s next set of planned updates dubbed the Surge, Verge and Purge will make the platform more efficient and aims to increase its throughput from a couple of dozen transactions per second to 100,000.

Other more notable digital assets are positive following the news. Ethereum Classic, a fork of the original Ethereum blockchain that maintained its proof-of-work setup is up 6.69% since the merge and 165 percent over the past three months. Ethereum Classic has seen a massive surge in mining activity as Ethereum’s miners look for new platforms to support. Blockchains like Ethereum Classic, Ravencoin, Beam, and others are compatible with Ethereum’s GPU-based mining equipment, though none appear to be able to profitably absorb the amount of computing power now available. Bitcoin uses a different type hashing algorithm and requires a more specific type of computer chip for mining, making it a non-option of Ethereum miners.

In addition LDO, a governance token used to operate liquid staking platform Lido, which provides instant liquidity to ether stakers rather than having tokens being locked in the platform for 6-12 months is also up 4.31 percent.

Furthermore, bitcoin is up a slight 0.12% since The Merge.

Furthermore, bitcoin is up a slight 0.12% since The Merge.

Ethereum staking is the backbone of the new network and users have been earning rewards by staking their ETH ahead of the merge. As time has gone on, rewards for staking have reduced, with the current rewards sitting around 4-5% for stakers. However, crypto exchange Coinbase sees this changing for the better once the merge is completed sometime in 2022 and offers better rewards.

Coinbase Says Staking Rewards Will Double

Crypto exchange Coinbase has informed its clients of upcoming changes to rewards on staked ETH. Due to the move from the current proof of work mechanism to the proof of stake mechanism after the merge, the exchange has said that it expects the rewards paid out for staking ETH to climb. The figures provided show that Coinbase is expecting these rewards to double.

Investors use platforms like Coinbase to stake their ETH because they can pool ETH with other users to create a full node since it requires 32 ETH to become a node validator. But with Coinbase, users are able to stake smaller amounts and still get rewards for them.

Related Reading | Can Chainalysis Break And Track Wasabi Wallet’s CoinJoins? Opinions Vary

Currently, rewards for staking ETH on Coinbase current attract around 4.3% to 5.4% in rewards for users. Coinbase has told its clients that it estimates that yields on staking could go upwards of 9-12% APR.

It expects this to happen around June when the Ethereum network is expected to move to the Consensus layer after the merge of the main net with the Beacon Chain. The increase in staking yields will be a direct result of the incorporation of net transaction (ex-base) fees that are currently paid to miners.

Coinbase expects ETH staking yields to rise to 9-12% APR post-merge. pic.twitter.com/ST6VcGjQDG

— Jacob Franek (Hiring for DAOs) (@panekkkk) February 23, 2022

When Is The Ethereum Merge Coming?

The move to the Consensus layer has been in the works for years now. Finally, it is 2022 and the estimated date for the merge draws close. It is expected to happen sometime in the middle of the year bar any delays that could arise.

ETH crumbles to $2,400 | Source: ETHUSD on TradingView.com

This move would push Ethereum towards the future, drastically reducing energy consumption and increasing the speed of the network. It would also be able to scale better with upgrades to the Shard Chains expected to continue improving the network. It would also greatly increase the security of the network.

Related Reading | World Leaders Condemn Russia’s Attack On Ukraine – Bitcoin Takes Severe Beating

Ethereum users will be able to directly benefit from the network by becoming validators. This removes the need for miners, which requires large energy consumption and rewards validators for bridging the gap and authorizing transactions.

While the merge is expected to take place this year, Shard chains will not come to the network until 2023.

Featured image from Coinbase, chart from TradingView.com