The Ethereum (CRYPTO: ETH) price didn’t exactly take off following yesterday’s completion of the long-awaited Merge.
The Merge, if you’re unfamiliar, has transitioned the Ethereum network away from a proof of work (PoW) protocol to a proof of stake (PoS) system.
The new PoS protocol sees validators stake some of their Ether holdings to earn rewards in return for verifying transactions and securing the blockchain. One of the most immediate advantages is the huge reduction in energy used, estimated at more than 99%, with far fewer computers required.
Many crypto investors also hope the Merge will light a fire under the Ethereum price.
As we mentioned, that didn’t happen yesterday. Ether tumbled more than 8% during Friday trading. Though it should be noted that most cryptos and risk assets came under selling pressure amid renewed fears of sharp rate hikes from the US Fed.
But in the months, and indeed years, ahead, the Merge looks like it might offer some strong tailwinds for the Ethereum price.
3 reasons the Merge could boost the Ethereum price longer-term
Addressing some of the bullish assessments around the Merge and its impact on Ethereum, Simon Peters, crypto market analyst at eToro said the Merge could potentially boost the Ethereum price for three reasons.
“Firstly, the issuance – the amount of new Ether entering circulation – will drop significantly, with estimates currently around a 90% fall,” he said.
“Secondly, a minimum fee must be paid to the network to execute transactions,” Peters said. “This fee will get ‘burned’ during the process, removing it from circulation. The burning of ETH from circulation will leave less of the crypto asset circulating in the system over time.”
As for the third aspect of the Merge that could boost the Ethereum price over time, Peters added, “Holders can begin staking – a form of passive reward for helping to secure the network. Again, this will take ETH out of the circulating supply.”
According to Peters:
In short, ETH could go deflationary. Less supply and more demand for ETH could cause the Ethereum price to rise post Merge as the scarcity begins to weigh on the token’s circulation, akin to when central banks raise interest rates and slow processes such as quantitative easing.
Of course, there are no guarantees in life. And generally, you’ll find two (or more) sides to every story.
Institutional investor skittishness
As cryptos were rocketing to fresh record highs in 2021, institutional investors began to take much more notice. More recently that interest has waned.
And it looks like the Merge may have caused some added angst amongst institutional investors.
“CoinShares recently released its weekly fund flows report, which showed a net outflow of ETH among institutional investors – albeit relatively small,” Peters said. “This could signal nervousness about technical issues that could arise with the Merge.”
Peters concluded:
Whether the Ethereum price will rise or fall on completion of the Merge, only time will tell. What is important though from a network development point of view, a significant milestone, years in the making, will finally be achieved.
Happy investing!
