Is the Ethereum “merger” driving this rally?

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Ether (ETH), the second-largest cryptocurrency by market cap, rose 45% over the week, outpacing most other assets you can bet on. There may be a simple explanation here:

Traders are getting bullish as Ethereum’s developer corps nears the end of a hyper-complicated years-long upgrade.

This article is excerpted from The Node, CoinDesk’s daily roundup of the most crucial stories in blockchain and crypto news. You can subscribe to take full advantage newsletter here.

Influential podcaster and committed industry watcher Nathaniel Whittemore suggested as much on his latest episode of “The breakdown.” On Twitter, Discord, and every other place where people discuss crypto, there is growing recognition that “the merger” could boost markets.

The market rally began last week, after Ethereum developer Tim Beiko proposed September 19during an open developer call for the network to finally move from proof of workan energy-intensive way to secure blockchains, at the most environmentally friendly proof of stake protocol.

The event signals, as Whittemore suggested, a “return of optimism” in crypto markets after a month of depressed prices. Additionally, the merger fills a “narrative void,” the stories that crypto folks can tell others about how this technology is reshaping the world.

The usefulness of stories

Stories are useful for people to coordinate actions alongside shared beliefs. But they can also be dangerous delusions, like Three Arrows Capital co-founder Su Zhu’s idea of ​​the “supercycle,” the idea that the last crypto rally was sustainable.

Countless companies contributed capital to Zhu’s hedge fund in part because of this idea, only to see 3AC implode after the overwhelming reality of multiple bad trades and a soured market.

There are a few reasons to be optimistic about Ethereum: namely, the merger would be the most sophisticated upgrade in the digital asset industry’s 14-year history. This would move ETH to a less environmentally taxed system and improve the functionality of the most widely used blockchain. It could also put crypto in the news in a positive light.

Others see structural reasons for how the merger could catalyze prices. The upgrade is a structural change in how Ethereum could be used – rewarding holders who stake their assets with the network. The change could even create Bitcoin-like deflationary pressures that reward holders more. In this scenario, people who buy ETH now in anticipation may think of it more as an investment than a trade.

See also: ‘Merge trading’ has begun, experts say, as ether rises

“There will be virtually no selling pressure when the merger takes place. Everyone who stakes is locked in, everyone who stays with their money in stETH is holding out until it repegs, whoever had their money on Voyager or Celsius is locked in bankruptcy proceedings for 5-10 years,” Ethereum crypto commentator Jesus tweetedreferring to the bankruptcy filings of crypto broker Voyager and crypto lender Celsius Network.

As with all stories, none of this has to be true for people to believe or trade. There is growing recognition that people might be “buying the news” of the merger, in a supreme example of the feedback loops that fuel many crypto pumps.

However, a risky business

The hope is that a “dump” will not follow. The merger represents the culmination of years of work, countless brain cycles, nearly immeasurable testnets, and ETH’s utmost support commitment to not only improving the network, but also ensuring that it can stand the test of time.

This is the story that people could buy. It is important, however, to recognize that this event is still a risky trade and that there are long-term regulatory and technological risks that crypto faces.

Whittemore began his show by explaining how crypto, “alongside every asset class,” is subject to broader macroeconomic forces like the US Federal Reserve’s efforts to rein in inflation and a potential recession.

“Crypto is not immune,” Whittemore said, and a “genuine bull market” is unlikely to return until the Fed ends its tightening. But in the meantime, it looks like crypto has another narrative.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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