Ready, Set, Merge
Plus: Bitcoin institutional adoption poised to grow
Based on IntoTheBlock’s weekly newsletter. If you enjoy it, and would like to receive it every Friday make sure to sign up here!
This week we cover the last step preparing Ethereum for the merge. We dive into its implications on Ethereum, as well as on staked ETH and the upcoming ETHPow token. Finally, we evaluate the institutional demand for Bitcoin following Blackrock’s news, looking at previous holding patterns and on-chain activity.
Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- On-chain activity for both Ethereum and Bitcoin spiked along with prices
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Bitcoin recorded relatively large inflows into centralized exchanges of $132M following last week’s outflows
- ETH, on the other hand, has seen consistent outflows over the past week, with almost $1B leaving exchanges, suggesting strong buying activity
Ready, Set, Merge
Ethereum successfully completed its last test prior to the merge. The Goerli testnet effectively migrated to proof of stake (PoS) Wednesday night, though initially there was some confusion due to block re-organizations. This marks the eleventh and final test for the anticipated upgrade to take place. Both ETH and stETH rallied on the news.
September 15–16 — The tentative date for the Ethereum merge is set for mid-September
- On the Ethereum block #58750000000000000000000 the current proof of work chain will merge with the Beacon chain
- In doing so, Ethereum will transition to proof of stake, a consensus mechanism where addresses staking ETH validate transactions as opposed to miners in the current state
- This is projected to reduce Ethereum’s energy footprint by 99%
Since miners incur significantly larger operational costs than stakers, the “security budget” for Ethereum on proof of stake will be much smaller. This translates into a 90% reduction in ETH’s issuance, making it deflationary as we discussed a few weeks ago in the newsletter.
This outcome is expected to be beneficial for Ethereum as a network and ETH holders alike at the expense of miners. For this reason, a group of miners has been orchestrating a forked version of the chain that will remain operating with proof of work past the merge: ETHPoW.
$13B Fork — The implied valuation of ETHPow at a price of $114 is over $10 billion. Here is what you need to know:
- A group of Ethereum miners led by Chandler Guo have coordinated to have a version of the network continuing to run on proof of work following the merge
- They have convinced a slew of exchanges such as Huobi, Poloniex and BitMEX to support the ETHPoW token, and based on BitMEX’s futures it is projected to be ~ 6% of the value of ETH
- However, applications on the ETHPoW network are likely to face structural issues as key pieces such as Chainlink oracles and Circle’s USDC will not support functionality on ETHPoW
Arbitrage or Long-term Viable? Addresses holding ETH on-chain will receive ETHPoW following the merge creating an arbitrage opportunity to freely claim this and swap for more Ether. Will this be the main use of the ETHPoW token? Or is there a reason to believe that a proof of work version of Ethereum will continue to run in parallel and grow in value long-term?
Bitcoin Institutional Adoption Poised to Grow
While Ethereum has been occupying most of the recent headlines in crypto, Bitcoin’s prospects also continue to improve. Blackrock, the $8.5 trillion asset manager, has launched a Bitcoin private trust offering access to BTC spot markets to its institutional base. This is likely to further solidify Bitcoin’s institutional appeal.
Institutional First — Bitcoin’s transactions increasingly skew towards big players
- Following summer 2020, the share of Bitcoin’s on-chain volume coming from transactions of over $100k (considered large transactions by ITB) has remained between 97% and 99.9%
- Throughout 2021, this figure was consistently at 99% and has since dropped to 98% during the bear market
- This decrease was felt to a greater extent in the 2018/19 bear market were large transactions share decreased to under 60% at one point
Over time more institutional investors continue to not only trade Bitcoin, but also to ‘hodl’ it as well.
Long-term Holders — Largest Bitcoin holdings sit with long-term-oriented entities
- Over 60% of Bitcoin’s supply has been held for over 1 year
- A record 24.3% has been held for over 5 years
- Entities that entered Bitcoin 5 years ago where mostly crypto-native firms and individuals
As the rails to buy crypto and stocks become the same, institutional access to Bitcoin becomes larger and larger. Following Blackrock’s news, we are poised to see institutional participation continue to grow; we will see if these end up becoming hodlers as well.
Upcoming Webinar
Sign up for our next webinar. Limited amount of free seats available.
In DeFi’s early days we saw an abundance of high yield opportunities, but a lack of risk management. As the sector matures it is primed to evolve into a a more resilient DeFi where yields are harder to come by and a greater emphasis is put on risk monitoring capabilities.
In this webinar, IntoTheBlock CEO Jesus Rodriguez will discussion this transition looking at data first-hand and providing an outlook for future trends within DeFi.
