Arthur Hayes, the former CEO of BitMEX, has written a blog post about how he expects Ethereum traders will react to the merger.
He believes that Ethereum will rally following a successful September transition, similar to how Bitcoin rallies during its periodic half-yearly halving cycles.
The Theory of Reflexivity
Hayes’ article titled “ETHflexive” centers his bullish thesis on George Soros’s “theory about reflexivity”. The theory states that market prices and market participants’ expectations for a market situation are connected by a feedback loop.
Hayes thinks that the merger can raise Ethereum’s value because of the reflexive relationship between the price and its deflationary characteristics.
He explained that if the merger is successful, traders will buy ETH today knowing that the greater the price rises, the more the network’s use will be and the more deflationary the network will become. This will drive the price higher, causing it to be used more and so forth. This is a win-win situation for bulls.
Two major changes will occur for Ethereum with the merger: It will change its consensus mechanism from proof-of-work to proof-of stake and reduce Ethereum’s supply issuance rate by approximately 90%. Some have dubbed the event “triple halves”
Many expect ETH to be a net deflationary currency after the upgrade when it is combined with EIP-1559, which strips ETH from circulation with every transaction. Hayes believes that ETH’s price appreciation can be influenced by its usage and deflationary issuance.
The co-founder also noted that the feedback loop could be against ETH, driving down its price in the event of a failed merger. However, ETH’s spot trading activity has outperformed Bitcoin over the past few weeks and suggests that market participants are expecting a successful merger event.
Don’t Sell the News
Glassnode data on Ethereum derivatives last week indicated that traders might be looking to “sell news” after the merger actually occurs in mid-September
The term structure of Ethereum futures trades in backwardation, which will continue until June 2023. Futures traders anticipate that ETH’s value will fall by the maturity dates of their contracts.
Hayes suggested two theories to explain why ETH might be under buy pressure in spot markets and sell pressure at the futures markets.
In the event of a failed merge, traders may be hedging their long-term physical ETH bets on the futures markets. They could also be protecting their ETH position by accumulating spot Ethereum to gain free tokens in the event of a failed merge.
Hayes believes that traders will “buy back the hedge” after a successful merger and that anyone trying to sell their spot ETH position will be in a minority. Hayes plans to grow his position if there is a selloff.
He wrote that he expected to see the event play out in a similar fashion as Bitcoin halvings. “We all know when they will happen, but Bitcoin rallies after halving.”
CryptoPotato’s first post, The Merge Will Rally Ethereum like a Bitcoin Halving: Arthur Hayes, appeared first on CryptoPotato.
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