Alexandre Lores | Aug 26, 2022 06:34AM ET
The Ethereum merge is fast approaching. After many delays, it is now set for September 15. This is a major event for the crypto space, where the world’s 2nd largest cryptocurrency will be switching over from Proof-of-Work consensys mechanism to a Proof-of-Stake consensys mechanism.
The main reason for the merge is to decrease energy usage. According to a claim from the Ethereum Foundation this could be as high as a 99.95% reduction in energy usage for the network.
Due to the various community and market dynamics, this presents five potential trades. Let’s dive in:
“Buy on rumors, sell on news.” Believe it or not, this trading adage actually goes back to a man named Joseph De La Vega who wrote a book about markets in 1688 called Confusion de Confusiones.
News traders generally focus on trading in the time leading up to a major news event or immediately after, when the market is still reacting to the news.
The idea is that rumors about a positive news event causes speculators or investors to buy, while the news itself actually results in them selling and taking profits.
A spectacular recent example in recent crypto history is Dogecoin. Doge famously pumped in the meme stock era, going from an opening of $0.004681 on January 1, 2021 to over $0.73 on May 8, 2021. This was a remarkable 16,222% pump.
On May 8, 2021 Elon Musk went on SNL and in fact jokingly pumped Dogecoin multiple times, which of course was widely publicized beforehand.
On April 30, the price opened at $0.3047. On May 8, intraday the price reached $0.7376, a 242% gain in just over a week.
Dogecoin ended the day at $0.64, and just two days later, ended on May 10 at $0.45, a 39% drop just two days after the show.
In this trade, for those who bought near the recent bottom before July 13 under $1,100 this would include taking profits at any time between now and September 15.
As more volatility could be expected right before the merge, those with even more risk appetite could buy more ETH between now and up to 24–48 hours before the merge before taking profits.
This is a trade for those long-term bearish on Ethereum.
Some of the main reasons one could be bearish on:
Traders could execute this trade by:
This is a trade for those long-term bullish on Ethereum.
Some of the main reasons one could be bullish:
Traders could execute this trade by:
Whether one is bearish or bullish on Ethereum, there is another higher-risk trade that one could take with Ethereum Classic.
Ethereum Classic was the original Ethereum network that was hard-forked in 2016 to reverse the infamous DAO hack, which was well explained here on Investopedia.
Proof-of-Work miners have machines that will be obsolete, unless they swap to a different blockchain on September 15. The most likely target is ETC.
Others who support Proof-of-Work for other reasons than simply profit would have an incentive to move over to ETC, despite its general lack of a large developer base.
Ethereum founder Vitalik Buterin even suggested that if someone doesn’t like Proof-of-Work they should join the Ethereum Classic community.
This could be executed as a short-term “buy the rumor, sell the news” or a longer-term trade. Many traders already have, as shown by these wild price swings, which have already occurred over the past 30 days.
Potential plays would include:
There is another alternative for those that have the same reasoning for moving over to ETC.
Again, this is:
This is the riskiest of all plays. There is a potential Ethereum Proof-of-Work fork that would be the largest of all PoW forks. It is unclear if this will even happen or if there will be more than one fork.
What is certain is that at least 7 exchanges are offering users to trade a token called “ETHW IOU”, that can be traded right now and hypothetically would be a real token after the merge.
This could of course be traded short and long-term, bullish or bearish. The greatest risk is that of course there is no guarantee that there will be someone there to close your trade on September 15 if this does not go as expected.
Also, another risk for a PoW blockchain is a 51% attack, where one bad actor could control more than half of the network and commit something called a double spend attack. In other words, defraud the network. Large networks like bitcoin do not have this issue. A much smaller chain has far greater risk.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
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