In case you missed last week’s letter, I’m focusing on the Ethereum Merge exclusively for the next few weeks, and you can check out Part 1: “Preparing for the Ethereum Merge” right here. For this weekend’s newsletter, I’ll be discussing how the Merge will affect $ETH prices in the short-term and long-term timeframes.

If you’re a believer, it’s quite tempting to make an outsized bet on Ethereum going into September. With the official Mainnet Merge announcement up on the Ethereum Foundation blog as of August 24th, we’re basically all locked in for this momentous transition. That said, I think that although we’ll see long-term price appreciation from $ETH after the Merge, there will be plenty of opportunities to go long or short throughout the next 6-12 months.

1. Let’s look at the numbers first. After we transition to the new consensus protocol, the amount of ETH awarded to the network validators (this used to be the miners) will be reduced from 13,000 ETH per day to just 1,600 ETH per day. Remember that these rewards are the only way that fresh ETH enters circulation, so what used to be a torrent of new coins will soon become a trickle. And let’s not forget that a chunk of $ETH is burned with every new block as part of the London transaction fee scheme introduced a year ago. With these two changes, the circulating supply of $ETH will grow by less than half a percent per year, a 90% reduction. (Check out Ultrasound.money for some nice visualizations.)

2. In theory, drastically reducing $ETH issuance will force long-term price appreciation, because scarcity amplifies demand. Many people are betting that it will have a similar impact on the market as the Bitcoin Halvening does every four years. Of course, in order for this to be true, we have to assume that Ethereum network activity is the same or greater than it is right now, because it won’t matter if $ETH issuance has slowed down if network traffic is also slowing down along with it. We also have to assume that the Ethereum Merge will be executed successfully, and with each new successful test run (we’ve had 3 now), this is looking more and more likely.

3. What’s the short-term outlook though? It feels like we hit the winter bottom back in June with a momentary dip below $1,000 for $ETH and below $20k for $BTC. We’re still far off from the Nov 2021 ATH of $4800, but at least we’ve reemerged from the McDonald’s levels and are currently trading at $1,600+ per $ETH. When the target date for the Merge was first announced in early August, we saw a nice rally to $2000, but there wasn’t quite enough energy to push past the psychological barrier. For now, it looks like we’re all waiting for the Merge to actually happen before making up our collective minds.

4. I expect there to be a lot of volatility in September, as bulls and bears alike try to do what they can against a tough economic backdrop. The Federal Reserve announced on Friday that it was continuing its attempts to control inflation, which means that market trading volumes will remain low. I believe that there will be long-term price appreciation for Ethereum, eventually sending it beyond $5000, but I don’t believe it’ll happen as a massive series of green candles in September. There will likely be some post-Merge selling as bettors take profit from the successful transition, so there may even be another buying opportunity for those who missed the $1000 clearance sale last month. In 2023, there will be another fairly large dump when all those ETH2 early adopters are finally allowed to unstake and withdraw their funds, but there’s no target date on this yet.

5. My portfolio going into September is 35% $ETH, 30% $BTC, 25% stables, 10% alts ($YGG, $AXS, $CRO, etc). The composition is a balance between safety and flexibility. I’m a long-term believer in both BTC and ETH, but the crypto winter could go on for a much longer period than anyone expects, so having a healthy amount of stables protects me from another lengthy slump. I could also theoretically use those stables to do an instant flip into either BTC or ETH if a strong buying opportunity presents itself. It’s also relevant that USD has appreciated nearly 10% against the PHP this year, so I’m getting better mileage on my stablecoins. If nothing else changes throughout the next 4-6 weeks, I’ll maintain this composition until winter begins to thaw.

See you all again next week, cryptofam!