Every crypto investor has probably heard by now that the Merge will be the single most important event in crypto history. It will transform Ethereum (ETH 0.19%) from a proof-of-work blockchain into a proof-of-stake blockchain, ushering in a new era of ultrascalability, lower transaction fees, incredible energy efficiency, and higher throughput capacity. This, in turn, will bolster the number of use cases for Ethereum and guarantee its place as the most important blockchain in the world.
That has been the primary investment thesis for buying Ethereum this entire summer. However, as we get closer to the expected date of the Merge, it's worth taking a closer look at some of the key factors that might affect the price of Ethereum. Take a quick look at the chart for Ethereum. After hitting a summertime high of $1,984.72 on Aug. 13, Ethereum actually trended down over the final two weeks of the month, and it now trades around $1,550. That has me thinking that we could already be seeing some profit-taking in Ethereum, and the narrative around the Merge could already be shifting.
'Buy the rumor, sell the news'
Maybe, just maybe, the hype has already been priced into the Merge. There has been so much speculation this summer about why the Merge is going to be wonderful both for Ethereum and crypto that many investors now assume the case for buying Ethereum is ironclad.
Image source: Getty Images.
But step back for a moment and consider that even Vitalik Buterin, the co-founder of Ethereum, now says the Merge will only be "55% complete" this year. There are still four more parts to the process -- the so-called Surge, Verge, Purge, and Splurge. So maybe we're celebrating a bit too early. Some of the earliest predictions about the Merge -- for example, that it will enable Ethereum to handle 100,000 transactions per second -- may turn out to be hopelessly optimistic. People are also starting to question whether the Merge will actually have any real impact on crypto gas fees, the transaction fees on the Ethereum blockchain.
We could be seeing a classic case of "buy the rumor, sell the news." In other words, buy Ethereum up to the expected date of the Merge, then sell when the Merge actually takes place. Let's face it -- investors are going to be spooked by any bit of bad news about the Merge. The complexity of the Merge cannot be overstated: Some have compared it to changing the engine of an airplane mid-flight. If there are passengers aboard, there is bound to be a certain amount of anxiety.
Jerome Powell vs. Vitalik Buterin
Moreover, all the enthusiasm surrounding the Merge has to be taken within the context of what is currently happening with the U.S. Federal Reserve. Any negative sentiment about inflation coming out of the Fed these days is bad for crypto. Consider what has happened to the sentiment around Bitcoin (BTC 0.76%) and other cryptos ever since the Jackson Hole speech by Fed Chairman Jerome Powell on Aug. 26.
This new investor focus on the Fed could mean that any positive sentiment surrounding Ethereum -- no matter how successful the Merge turns out to be -- is going to be far outweighed by all the negative sentiment surrounding inflation, interest rates, and the prospect of more Fed tightening. The next meeting of the Federal Open Market Committee (FOMC) will take place on Sept. 20, which is almost exactly when the Merge is scheduled to be completed.
Be prepared for a change of narrative
Opinions about the Merge are much more varied than you might think within the crypto community. People are starting to realize that there are a number of trade-offs involved with any technological upgrade, and that the Merge is no different. Moreover, it's not exactly the case that all crypto enthusiasts are united in their support of the Merge. As long as the price of Ethereum is going up, they are going to support the Merge, of course. But what happens if the price doesn't go up? So be prepared for a change of narrative around Ethereum if there are any problems with the upgrade.
The Ethereum Merge will start on Sept. 6, which is almost exactly when relaxed, suntanned investors will be returning from their Labor Day vacations. This is when the real fun starts, because nobody knows the exact date and time of the Merge. It could take place anytime between Sept. 10 and Sept. 20. If people get too nervous, the same people who told you to "buy the dip" might tell you to "sell the rip." Don't say you weren't warned.
