The Ethereum (ETH-USD) Merge is coming, but what is The Merge?
As often happens, it's not a merge, it's a big change. Ethereum is a cryptocurrency, which has a virtual computer attached, which enables lots of clever things like DeFi (decentralised finance), NFTs (a kind of unique digital entity) and a number of other potentially revolutionary technical innovations.
The trouble is, it is driven by a system called proof of work ("POW"). Within this structure, anyone can enter an arms race to be an administrator of the network using random computer hardware in a contest to "prove" they worked hard for that right. In the battle of "proof of work," computers race to solve a huge, nasty mathematical puzzle. The first to solve wins the prize of adding the next lot of information to the Ethereum blockchain and gets a reward equivalent to thousands of dollars. The problem with this proof of work arms race is that it is driven by computing which is in turn driven by electricity and that's not a popular mechanism right now. The fact that there are 250,000 bank offices burning electricity and that banknotes piled on top of each other would stretch a long way to the moon still doesn't let crypto off the hook of burning lots of energy. "Proof of work" BAD is the general opinion.
The alternative is "proof of stake" ("POS"). Here you put a pile of money into a stake that proves you own that crypto - in this case, Ethereum - and this is held in a computer's encrypted file. That computer gets to be in a lottery for a payout while joining in a whole network of computers doing the maintenance of the Ethereum blockchain. This uses way less energy, so "proof of stake" good.
I'm not so sure but no matter, this is going to happen on the 15th of September or thereabouts, whatever my opinion.
So here we do a crypto equivalent of a handbrake turn. Ethereum is going to hard fork from POW to POS. OK, so fine. However, a load of people will likely continue with the old POW Ethereum and the chain will split with most people and enterprises using the new shiny POS Ethereum. Here is the twist: when the split occurs, people with ETH could end up with new Ethereum POS and…. AND old POW Ethereum. That old POW Ethereum will have a value because the old system will likely continue working, and the new system might not work or might not work so well and may not be a total replacement for the old system.
Therefore, "smart" people have been piling into Ethereum to catch the split in the hope to make some free money. This worked great with Bitcoin when Bitcoin Cash happened, and it also paid out with other Bitcoin forks.
It is dangerous.
Right now, an equivalent token is worth $35. So, if you have 10 Ethereum worth $17000 you might be in for a $350 bonus. That's a 5% result. However, the risk is high.
On the upside, Ethereum POS might misfire and fall a lot but not as much as the ETH POW might rise. That's a rather sketchy reason to jump in.
Ethereum POS might be great and create a big rally, and the POW delivers a nice bonus which also might rally. Again, you must consider that markets rise on expectations and fall on realisations; that has Ethereum rising to the fork and then dropping hard afterwards.
This is what I think is highly likely:
The second the chain splits, the cool crypto cats with their tech-savvy chops will harvest their POW Ethereum and dump it instantly. The Ethereum POW token will go poof to new lows. In markets, it's the first to the exit that wins, and this will likely be no different.
Many will have borrowed or bought the Ethereum for the fork and will then sell it or repay it quickly because they only held it for this event. Clunk down will go Ethereum.
EthPoW (IOU) - the current token representing the post-fork Ethereum POW - has fallen $140 in the last month to a low of $28, and it is popping (Saturday 10th) showing this is a retail idea. If you were smart, you would buy/borrow ETH and sell the IOU now to hedge the outcome. After the fork, you either end up prepared to "wear" the Ethereum or you have to dump it.
If you timed it so to catch the recent ETH low with an eye to predicting the crypto Apes piling in and pushing ETH up and then catching the fork, you are probably going to come away with a profit. However, if you go Ape yourself and are late to the party, you are going to lose some bananas by buying access to ETH POW, which will likely vaporise and you'll end up wearing those Ethereum at a lower price.
Just to add some further risk: you better know how to get those Ethereum POW tokens off the new chain, because there will be plenty of criminals asking for your private keys in one covert way or another with an eye to draining your wallet.
So, what to do?
This article was written by
Disclosure: I/we have a beneficial long position in the shares of ETH-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: As of writing I am long but maybe short when you read this article.