- Richard Heart says the Merge is bullish for Ethereum long-term.
- Short term, there are too many negative variables that play against the price of ether.
- They include technical glitches, bitcoin’s price, and the wider economic environment.
A milestone event for the crypto sector is fast approaching.
In mid-September, Ethereum is expected to make its long-anticipated upgrade known as the Merge. The switch will take the crypto’s blockchain from proof-of-work (PoW) to proof-of-stake (PoS) which is supposed to reduce its energy usage by more than 99%.
Removing miners from the equation will also drop operating expenses. The value generated from fees will instead be distributed to those staking their ether. The remainder will get burned, which could make the crypto deflationary. Hal Press, founder of the digital asset hedge fund North Rock Digital, compares the new distribution structure to dividend yields and stock buybacks in equities.
Even though we’re in a crypto winter, old habits die hard. The shift has some investors getting back to their old ways of buying the rumor and selling the news. Ether hit its lowest year-to-date price in mid-June when it broke below $1,000, down by about 80% from its all-time high. But by mid-August, it had tapped $2,000 before dropping back down. As of Wednesday, it was trading near $1,567. Extreme volatility in crypto is like butter to bread, it’s expected.
The upgrade is indeed bullish news for Ethereum. It will stabilize and increase ether’s price long-term because selling pressure from miners who are swapping their rewards to cover operating costs will be removed, says Richard Schueler, who is publicly known by the surname Heart. What it won’t do is reduce fees, which investors need to understand.
Heart says buying ether now is just a bad strategy. Short-term, there are too many moving variables that could play against the price of ether.
He’s the founder of Hex, an ERC20 token launched on Ethereum’s network that’s designed to replace high-interest savings accounts and act as a store of value. He’s also working on a new layer-1 called PulseChain, a controversial project that’s meant to be a replicated fork of Ethereum that copies a holder’s ether onto itself.
He told Insider if Ethereum’s upgrade has a hitch, Hex would have problems too. Like any software upgrade, there could be things that go wrong. This is one reason why he doesn’t recommend making speculative bets before the Merge.
The risk isn’t limited to a plunge in price. In traditional equities, investors speculate all the time. They can even short a stock if they think the underlying company will fail. However, a failed blockchain upgrade may not even mean a drop in price. Instead, it could lead to a freeze in transactions, he noted.
There’s also a strong possibility that bitcoin’s price will plunge even further, which historically drags down ether’s price as well. Bitcoin and ether have consistently had a positive correlation since late-2017, and with a coefficient of 0.83, both tend to rise and fall together, according to Coin Metrics data.
First, bitcoin still hasn’t dropped by up to 85% from its all-time high, a pattern observed during crypto winters. In a previous interview with Insider, Heart said that bitcoin would need to land anywhere between $10,600 to $10,350 to bottom out. This would mean ether’s bottom price is at about $750.
Second, crypto’s previous winters didn’t occur during wider economic turmoil, he added. This time, however, the Federal Reserve isn’t done with its fight against inflation, which means interest rates will continue to rise. And as long as rates are going up, the stock market and crypto will only go down, he said.
Third, Heart points out that the Grayscale Bitcoin Trust (GBTC), which buys bitcoin and then sells shares, is trading at around a 33% discount to the value of the bitcoin. This siphons away demand for actual bitcoin, in his view.
“The dream would be, they stop raising rates. Bitcoin does its 85% dump, and the Grayscale discount goes away,” Heart said.
Finally, the bitcoin community is still awaiting the inventory of hundreds of thousands of bitcoin becoming available once the US and Japanese governments release seized coins from Ross Ulbricht, founder of Silk Road, and Tokyo-based bitcoin exchange, Mt. Gox.
At some point, bitcoin can diverge from the stock market or ether can diverge from bitcoin, Heart noted. However, this would only happen once everyone is done selling.