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Were you in front of your screen around 3am last Thursday? All our team surely was to live this historic moment! It is now done. During the night of Wednesday to Thursday on September 15th, the Ethereum network Merge has finally been activated. Goodbye proof-of-work, welcome proof-of-stake! The upgrade went off without a hitch, allowing for a complete reinvention of the chain’s consensus mode without any downtime. A resounding success as well as a crucial step in the long-term development of Ethereum.
Specifically, for those who have not followed this transition, the security of the network and the discovery of blocks on the chain are no longer done by providing computer work, but rather by staking his own Ether. As a result, the energy requirement for the operation of the chain is reduced by 99.95% overnight. In addition, the growth of the ETH supply changes completely. While it was 3.79% annually just last week, it will now be almost zero, at 0.2%.
The Merge is not the end of Ethereum’s transitional journey. The event marks just over half of Ethereum’s transition – 55% of the way through to be precise, according to Ethereum co-founder Vitalik Buterin. Sharding is Ethereum’s next major goal, which aims to improve scalability by segmenting the blockchain into parallel portions. This step could be introduced next year. Shards will give Ethereum more storage capacity and data access, but they won’t be used to run code.
As is often the case in the markets, despite the entire success of the deal, we saw a “buy the rumor, sell the news” moment. It must be said that the current traditional market environment certainly did not help. Speculators liquidated over $127 million worth of ETH in the hours following the merger, driving the value of the cryptocurrency lower. While some of this activity was expected, the scale of the liquidation could have been accelerated by SEC Chairman Gary Gensler’s statement on Thursday that proof-of-stake cryptocurrencies like ETH could be considered and regulated as securities. In addition, Ethereum miners have sold more than 14,785 ETH, for about $20 million at today’s prices, since Sept. 9 through the day of the merger, according to data collected by OKLink. Ethereum inflows also peaked before the merger. On Sept. 14, inflows on the exchanges peaked at 2.4 million ETH, according to data from IntoTheBlock. High inflows are generally considered a bearish event, as speculators move funds from cold wallets to sell on the open market.
What about those who promised to create a hard fork to keep the ETH proof-of-work chain alive? While the merger of the main network went off without a hitch, the same cannot be said for this chain. Shortly after the launch of the main ETHPoW network on Thursday, users began to experience problems accessing the network. It quickly became apparent that part of the problem was that ETHPoW had chosen a channel ID that was already in use, a problem that should have easily been spotted with prior testing. This flaw led to a replay attack that allowed the attacker to siphon off 200 ETHW tokens. The price of the ETHW token dropped about 37% following this news, hitting a new low of $4.22 earlier on Monday. It is currently trading at just over $6. The price reached over $60 at the time of the merger, but clearly, this project is far from a success so far.
The Tether stablecoin has always claimed to have reserves to honor every coin issued. The firm behind the token will now have to prove it. A New York judge has ordered the issuer to produce financial documents proving USDT’s dollar backing, as part of a lawsuit alleging that the company manipulated the crypto markets. Tether, which is owned by the same company as the Bitfinex exchange, was ordered to publish “ledgers, balance sheets, income statements, cash flow statements and profit and loss statements,” as well as information on the timing of transactions. The order also requires Tether to disclose details of the accounts it holds on Bitfinex, Poloniex and Bittrex exchanges. Attorneys representing Tether attempted to block Judge Katherine Polk Failla’s order, calling it “overly burdensome,” but the judge concluded that the “documents the plaintiffs seek are undoubtedly material”. This is a double-edged story. If Tether’s holdings are confirmed, it will undoubtedly bring its share of confidence to investors and cement the token’s place as a leader in stablecoin issuance. Should the reserves be partial, however, it could create another earthquake in the industry.
The White House released its first-ever framework for what cryptocurrency regulation should look like in the U.S. on Friday. The framework outlines how the financial services industry should evolve to facilitate borderless transactions, as well as how to crack down on fraud in the digital asset space. The framework also highlights the potential for “significant benefits” from a U.S. central bank digital currency, or CBDC, which you can think of as a digital form of the U.S. dollar. Five speakers at a U.S. House Financial Services Committee hearing on Tuesday actually spoke in favor of the U.S. developing such a CBDC, citing competition from China, which is making progress in developing its digital currency.
Some things never change! Michael Saylor announced that MicroStrategy had purchased another 301 bitcoins, totaling $6 million at the time of purchase. This latest purchase brings the business intelligence company’s total holdings to 130,000 bitcoins.
We mentioned last week that a South Korean arrest warrant had been issued for Terra co-founder Do Kwon, as the project collapsed outright this summer. South Korean prosecutors have now asked Interpol to issue a red notice. According to a report in the Financial Times, the Seoul Southern District Prosecutor’s Office has “initiated the process to place [Kwon] on the Interpol red notice list and revoke his passport.” Interpol red notices are issued for fugitives wanted either for prosecution or to serve a sentence. On Saturday, Do Kwon himself tweeted that he was not “on the run, or anything similar,” adding that “for any government agency that has shown an interest in communicating, we are in full cooperation and have nothing to hide.” Nevertheless, Singapore authorities confirm that Kwon is no longer in the city-state.
Colorado has become the first U.S. state to accept bitcoin for tax payments. Governor Jared Polis announced the new payment method on Monday at Denver Startup Week. Citizens can use cryptocurrencies to pay personal income tax, business income tax, sales and use tax, withholding tax, severance tax and fuel excise tax are eligible, according to the report. However, users wishing to part with their bitcoins to pay Colorado state taxes must use a PayPal account.
The 30-day correlation between ETH and Nasdaq, Wall Street’s technology index, strengthened from 0.58 to a four-month high of 0.765, according to data tracked by trading giant Cumberland. A correlation value of 0.7 and above implies a significant positive relationship between the two. All of which is to say that broad macro trends are playing much stronger in the markets right now than the fundamental advance of the ETH project. “In the price action space, this degree of macroeconomic correlation has made it difficult for cryptocurrency participants to extract the alpha of their advantage: deep understanding of on-chain dynamics,” Cumberland adds.
To that end, today is crucial. The Fed will announce its next interest rate hike at 2 p.m. today. A new hawkish stance from Powell could once again weigh on risk assets, although many observers believe the market has already priced in such a scenario. “Expectations are very hawkish and the Fed may come out as expected or be more dovish than expected,” wrote Brad McMillan, chief investment officer and a managing director at Commonwealth Financial Network, in the Fed preview. “This limits the market’s downside from this meeting and may simply provide some upside going forward.”
The fund’s positioning remains very defensive, at least pending this afternoon’s decisions. Aside from a few small secondary positions (MATIC and KNC), we are primarily exposed to bitcoin.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of September 21st, 2022, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
