While the markets were finally showing encouraging signs just yesterday morning, higher than expected inflation data threw a real cold shower on most assets. Indeed, U.S. stock indexes had their worst day of 2022. Bitcoin followed the trend, losing 9% in yesterday’s session alone. The decline comes at a particularly inopportune time for bitcoin, the cryptocurrency that had just finally closed above its 50-day moving average and was testing its long-term downward resistance.

Is the CPI data really that bad? High, sure, but not that far off the mark. What we witnessed yesterday looks like a real repositioning of many investors, who were instead expecting data below expectations, thanks in part to the sharp drop in gasoline prices in August. It was the cost of services, excluding those related to energy, which was up significantly. The fundamental change itself is not strong, but market sentiment has changed dramatically, at least in the short term.

What is most disappointing is that bitcoin continues its high correlation with risky assets rather than acting as a hedge in an inflationary environment, as its nature so well allows, at least on paper. As Gemini’s Tyler Winklevoss notes:
 

Less than 24 hours now separate us from the Merge, the long-awaited switch from proof-of-work to proof-of-stake consensus mode for the Ethereum blockchain. We have elaborated extensively on the technical challenge and the different steps that led us to this turning point. We won’t do that again today. Let’s just take this image from the Ethereum Foundation itself: “Imagine Ethereum is a spaceship that isn’t quite ready for an interstellar voyage. With the Beacon Chain, the community has built a new engine and a hardened hull. After significant testing, it’s almost time to hot-swap the new engine for the old mid-flight.” The success of the operation will be a phenomenal step forward for the industry. Its failure would be inversely dramatic.

At the time of writing, exactly 85% of the clients are up to date and therefore ready for the merge. The exact time of this transition cannot be known, as the level of difficulty of the network is constantly changing depending on the hashrate pointed toward the chain. However, current best estimates suggest that the key moment will occur between midnight and 2:00 a.m. Eastern time next night. From that moment on, blocks of transactions will have to start being offered on the proof-of-stake chain. Every 12 seconds, under Ethereum’s new system, a validator will be randomly selected to propose a “block” to the chain – a list of transactions they want to put on the ledger. “We expect a block like clockwork every 12 seconds on the proof-of-stake chain” explains Ben Edgingtoon of ConsenSys. “Every ‘slot,’ which is a 12-second interval, a validator is chosen by the protocol to propose a block for that slot. If that validator is offline, is on a different fork, or is otherwise not participating correctly, then that block goes missing,” In short, “Immediately, we will see empty slot, empty slot, empty slot, and that will be the first sign of trouble. If we see ‘block, block, block, block, block,’ then we’ll know everything is fine,” Edgington explains. A few missed slots, however, are not immediately calls for desperate concern.

The real confirmation of the migration’s success, however, will come only when the participation rate in the new network is confirmed, when “the network collectively declares a block – a checkpoint in time where it can never be reversed. We will never rewrite history from before that point.” In other words, that’s when transactions written to the new proof-of-stake ledger become irreversible. “The moment we pop the champagne is when we finalize the merger checkpoint, which will be somewhere between 13 and 15 minutes after the merger,” concludes Edgington. Interested in experiencing the moment live? Log on to beaconcha.in to follow the migration block by block and wenmerge.com for a countdown bringing us closer to the Merge.

The team behind EthereumPoW (ETHW) plans to officially launch its hardfork shortly after the Merge. This chain aims to continue the current proof-of-work consensus mode, allowing miners to continue accumulating rewards through computer work rather than Ether staking. “ETHW mainnet will happen within 24 hours after the Merge,” the @EthereumPow Twitter account posted. “The exact time will be announced 1 hour before launch with a countdown timer, and everything including final code, binaries, config files, nodes info, RPC, explorer, etc. will be made public when the time’s up.” Several exchanges have expressed interest or already listed the forked ETHW, including Poloniex, Bitfinex and Coinbase.

According to what analysts at Bank of America said on Friday, the overnight upgrade could drive institutional adoption. In a memo, the second-largest U.S. bank said the ability for Ethereum users to stake (i.e., commit assets to the network) could increase interest from large investors. In addition, the reduction in energy footprint by 99.95% with the new blockchain will greatly help the justification for such players to enter the industry.  “The significant reduction in energy consumption after the Merge could allow some institutional investors to buy the token, whereas they were previously prohibited from buying tokens running on blockchains using proof-of-work consensus mechanisms,” wrote Bank of America analysts Alkesh Shah and Andrew Moss in their Friday note.  The two analysts added that staking Ethereum and generating “higher quality (lower credit and liquidity risk) returns as a validator” – as opposed to “black-box lending applications” – could also drive institutional adoption. In other words, institutional investors are far more likely to participate in Ethereum staking to generate returns than to seek a return by lending and borrowing Ethereum-based assets on risky decentralized finance apps.

A South Korean court has issued an arrest warrant for Do Kwon, the co-founder of the now-defunct stablecoin issuer Terraform Labs. The warrant comes four months after the collapse of the $40 billion Terra ecosystem and its algorithmic stablecoin (UST). The warrant was reportedly issued in connection with a capital market violation and targets five other individuals currently residing in Singapore. Terra’s collapse is the first domino in a series of industry failures that have placed us in this new winter for the cryptocurrency market.

Digital asset custodian BitGo is persisting with its threats. The firm has indeed just filed a lawsuit against crypto investment firm Galaxy Digital, following up on its announced plan to seek more than $100 million in damages after Galaxy pulled out of its proposed acquisition of the company. Galaxy Digital had previously said it would not have to pay a termination fee for ending the deal. This is another saga that promises to be a hot topic in the coming months.

See you next week on the other side of this long awaited ETH network Merge!

Rivemont Investments, manager of the Rivemont Crypto Fund.

The presented information is as of September 14th, 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.