I’m Worried About September...
I’m Worried About September...
This Week in Bitcoin - August 28, 2022
I’m Worried About September...
Two words: Ethereum Merge
Let’s talk about ethereum.
Ethereum’s upcoming merge to proof of stake is set to begin on Sept. 6 and conclude sometime between Sept. 10-20. It’s here, it’s finally here, I think… I can’t stop consuming content about the merge. It’s hands down one of if not the most anticipated event in the cryptocurrency space this year.
The world’s second largest cryptocurrency by market cap is getting a major upgrade. They’ve been talking about it for years and it’s been delayed several times. Now, it looks like there’s no turning back and it’s making me anxious.
The Merge
Ethereum is moving from proof of work to something called proof of stake. Proof of work means cryptocurrency mining. In short, computers run the network software and solve mathematical equations in order to process transactions on the network. When they’re processed, those transactions are added to the blockchain and the miners are rewarded some crypto for their efforts.
Proof of stake removes miners. Instead, holders of the crypto will validate and process transactions. For the upcoming ethereum proof of stake protocol, it requires you to own and “stake” at least 32 ETH to be a validator. That means you lock up your ETH on the network and in turn earn the right to validate. In return for your efforts, you earn a percentage yield paid in ETH.
Bitcoin is proof of work. Really, only a handful of other top cryptocurrencies worth mentioning are also proof of work, including ethereum’s original network which is now known as ethereum classic.
Why am I worried?
So, why does the switch from proof of work to proof of stake concern me? Many etherians are extremely bullish about the merge. They tout that the merge will reduce ethereum’s energy consumption by more than 99% and that it will set up the network to be able to scale faster in ways they haven’t been able to yet.
Ethereum has always been more “experimental” than bitcoin. While both are open-source projects, ethereum changes a lot more. Sometimes, this means innovation. Other times, this means pivoting because a prior roadmap wasn’t working.
First things first, I hold ETH. I bought ether in 2016. While I did convert some ETH to BTC, I’ve largely held my ether. I even mined ethereum for the better part of a year before switching to mining ravencoin and ethereum classic instead.
I believe that proof of work fundamentally encourages greater decentralization in a way that proof of stake does not and I could no longer offer my computing power to a project that was actively planning to get rid of miners like myself. Ethereum has also always been less privacy-focused than bitcoin and I believe the move to proof of stake will chip away at the little privacy that ETH holders currently have.
A Lot at “Stake”
My personal crypto beliefs aside, I’ll still hold the ETH I told you I own after the merge. From an investment standpoint, the merge could likely remain a bullish indicator for the future of ETH and other ethereum-based cryptocurrencies. Ethereum is a building ground. A lot of tokens and projects are built on and around it and utilize the ethereum network in order to operate.
But, there’s a lot at stake around the merge. With the recent crypto market correction, ethereum is still close to a $200 billion market cap. A lot of that value is also already locked up, and has been for months, in staking protocols where participants have not been able to access their ETH and won’t be able to access their ETH post-merge until the code is actually built and implemented to do so.
Things feel forced right now.
The merge is something that was supposed to happen, so it is. That’s the sentiment I’m gathering from those who aren’t full on etherian bulls.
On top of current staking participants using exchanges such as Coinbase who will not be able to access their stakes post-merge, these centralized exchanges themselves will automatically assume vital gatekeeper roles in a post-merge world.
Some of the largest validators:
Binance
Coinbase
Bitcoin Suisse
Kraken
Lido
These are centralized points of failure that will act as the leading governance authorities on the ethereum network. Bullish etherians would say that the ethereum community can always fight back if these validators turn into bad actors and, for example, bend to government pressure to censor certain transactions.
Yes, the community can always mobilize and ethereum will still allow anyone to run a node but, if a large-scale censorship attack occurs, I worry about ethereum’s actual ability to weather the storm.
It could be paranoia but we’ve already seen what happens when billions of dollars are locked up with centralized entities that everyone trusted… Things can go wrong and when they do, it’s not a simple cleanup.
Censorship-resistance and doing away with the need for trusted third parties is the entire point of bitcoin and, in my opinion, cryptocurrency, and ethereum is actively moving in the opposite direction.
Smaller Concerns
The merge will not:
reduce transaction fees
increase transaction speed
allow staking withdrawals
Eventually, the merge will allow stakers to withdraw their ETH but, when that happens, there will be withdrawal limits in order to prevent a “bank run.” Ethereum’s website has lots of other good insights around the merge that are worth looking into.
Market Action
I’m also slightly concerned about crypto markets around the merge. If things do not go as planned, an already unstable market could see increased selloffs from those whose ETH isn’t locked up in staking.
It’s difficult to say whether or not the merge is already priced in. We saw a massive ETH price jump in July and August. It gained nearly 60% in July alone.
Last week though, markets cooled off as the US Fed announced that it will continue to combat inflation, saying that they see “some pain ahead.” If traditional markets turn bearish and the merge encounters unexpected hurdles, investors could be in for a rocky finish to 2022.
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Crypto Bits
Mt Gox bitcoin!!!
The now defunct bitcoin exchange, Mt Gox, is back in the news after shuttering its doors roughly eight years ago. Why’s that? Well, when the exchange closed up shop, they did so because they couldn’t account for 850,000 bitcoin!
Now, some of that “lost” or stolen bitcoin is going back to investors. If you had bitcoin on Mt Gox and submitted a claim, you may have BTC coming your way.
As the price of bitcoin fights $20,000, rumors are swirly that 140,000 Mt Gox bitcoin are set to be released. Fears of this precipitating a selloff are running rampant.
Cointelegraph addressed some of the rumors and it should be noted that the creditors involved in the Mt Gox situation are simply beginning the process. It should also be noted that even if all 140,000 bitcoin were introduced into the open markets at once, it would only account for about 1/10th of current daily trading volume.
The Mt Gox bitcoin is an overall positive for crypto. It doesn’t come close to making investors whole but it’s at least nice to see some early bitcoiners be compensated for the mishaps that stemmed from the early exchange.
Mt Gox serves as a constant reminder that crypto exchanges are the centralized entities bitcoin seeks to remove from the equation.
Between 2011 and 2013 though, it was hard to get bitcoin anywhere but Mt Gox and a few other exchanges. Early adopters were forced to use their services as onramps to get into bitcoin. The bitcoin network is far more robust and decentralized nowadays. The release of some Mt Gox bitcoin is simply an end to a wild early chapter in bitcoin.
The pain cometh…
I mentioned it earlier… US Fed chair Jerome Powell told the world that there’s more pain ahead when it comes to the fight against inflation. It’s a fight I’m not sure is even possible to win but central banks the world over are doing what they can.
In the US, the Fed will continue to evaluate numbers and most see increased tightening with the potential for yet another rate hike in September.
Speaking from Jackson Hole, Wyoming, Powell said that higher interest rates likely will persist “for some time.” He added that history “cautions strongly against prematurely loosening policy.”
What does this mean? Well, traditional markets sold off on the news to end last week and we could see more of that if tightening continues into Q4.
Market Watch
Key metrics I’m tracking.
Crypto Dominance
40.45% BTC
19.17% ETH
“Dominance” refers to each cryptocurrency’s share of the total crypto market cap. I use TradingView to track bitcoin and crypto dominance. Ethereum is the #2 crypto.
Market Sentiment
Markets are emotional.
The “Fear and Greed Index” refers to overall crypto market sentiment. More fear means investors are worried. More greed means markets are due to correct.
fear can be a buying opportunity
greed can signal a correction
Today’s Price
Conclusion
Darkest before the dawn…
It’s not all doom and gloom.
I have concerns over the ethereum merge but ultimately September will come and go and crypto, especially bitcoin, will continue to do what it does best.
While the merge could usher in some unexpected volatility on top of an already unstable market, it’s something we have to simply wait out. I’ll hold the ETH I currently own through the merge and have no plans of staking it before, during, or after. My long term strategy when it comes to ETH remains—look for opportunities to convert these holdings to bitcoin.
Keep an eye on the Fed and traditional markets this week as well as economic news out of China. A few weeks ago, I talked about the poor economic data coming out of China that was signaling a slowing economy.
This week also marks the August close. I’ll be sending the monthly crypto report to premium subscribers of the email next week. If you’re not yet a premium subscriber, be sure to upgrade today so you receive that and all reports moving forward.
Enjoy the week ahead!
Thx for reading!
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I am not an investment or financial advisor. All opinions expressed are mine alone. Read the full DISCLAIMER on the About page.