On Friday (August 19), Arthur Hayes, Co-Founder and former CEO of BitMEX, shared his thoughts on Ethereum’s price action.

On August 16, Hayes published a blog post (titled “ETH-flexive”) that talked about Ethereum’s upcoming “Merge” protocol upgrade, which is when the Ethereum network is making the transition from proof-of-work (PoW) to proof-of-stake (PoS).

Here is how Ethereum Foundation explains the Merge, which is expected to take place around September 15:

The Merge represents the joining of the existing execution layer of Ethereum (the Mainnet we use today) with its new proof-of-stake consensus layer, the Beacon Chain. It eliminates the need for energy-intensive mining and instead secures the network using staked ETH. A truly exciting step in realizing the Ethereum vision – more scalability, security, and sustainability.

It’s important to remember that initially, the Beacon Chain shipped separately from Mainnet. Ethereum Mainnet – with all it’s accounts, balances, smart contracts, and blockchain state – continues to be secured by proof-of-work, even while the Beacon Chain runs in parallel using proof-of-stake. The approaching Merge is when these two systems finally come together, and proof-of-work is replaced permanently by proof-of-stake.

Let’s consider an analogy. 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. This will merge the new, more efficient engine into the existing ship, ready to put in some serious lightyears and take on the universe.

In his blog post, the former BitMEX CEO discussed the consequences of a successful and a failed Merge event:

If the merge is successful, there is a positive reflexive relationship between the price and the amount of currency deflation. Therefore, traders will buy ETH today, knowing that the higher the price goes, the more the network will be used and the more deflationary it will become, driving the price higher, causing the network to be used more, and so on and so forth. This is a virtuous circle for bulls. The ceiling is when all of humanity has an Ethereum wallet address. 

If the merge is not successful, there will be a negatively reflexive relationship between the price and the amount of currency deflation. Or, to put it another way, there will be a positively reflexive relationship between the price and the amount of currency inflation. Therefore, in this scenario, I believe traders will either go short or choose not to own ETH.

There is a floor to this relationship in that the network is the longest operating decentralised network. ETH hit a very large marketcap without a merge narrative. The most popular dApps are built using Ethereum, and Ethereum also possesses the largest number of developers of any layer-1 chain. In light of that, and as I mentioned in my previous essay “Max Bidding”, I believe that ETH won’t go lower than the $800 to $1,000 prices it experienced during the TerraUSD / Three Arrows crypto credit meltdown.

Then, on August 19, Hayes took to Twitter to share his thoughts on Ethereum’s recent price action, and to explain to medium/long term investors why this could be a great dip-buying opportunity:

“Ouchie. Time to do some thinking. Are you trading a medium to long-term fundamental thesis? Or are you trading short-term price action? The short-term price action is ugly. Assuming you are long, it could mean you read the market wrong. Is it time to cover, sit tight or add more? That all depends on your nerve and how well you can read the chart.

If you are trading a fundamental thesis, has your thesis been invalidated by the price action? Have any tenants of your thesis changed which is the cause of the price action? Unless the price action is driven by a change in one of the tenets of your thesis, then the price action should be ignored. And depending on your capital position, it might be prudent to add more to your position.

If you tell me the $ETH merge ain’t happening, or something occurred which severely diminishes it’s probability of success then I would be worried about my long position. If something critical happened to decrease the probability of a successful merge, I would expect the ETH/BTC cross to fall much lower than 0.079 given it has advanced off of a 0.05 local low in mid-June. With that in mind, it might be time to go shopping.

According to data by TradingView, on Bitstamp, currently (as of 10:35 a.m. UTC on August 21) ETH-USD is trading around $1,625.

Source: TradingView (5-Day ETH-USD Chart)

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