“The ethereum to bitcoin cross rate has moved materially in the past few months,” Mr Galvin said. “Our view is it’s the strong narrative around the merger which has seen increased inflows to ethereum, at the cost of bitcoin,” he said.
Ethereum was around 0.049 of Bitcoin’s price in mid-June. Today, it’s risen to 0.079 as Bitcoin has fallen into the $US19,500 range, Mr Galvin said.
The crypto evangelist also believes rising interest rate expectations are a headwind for bitcoin and the cryptocurrency market as a whole, saying this is the most correlated he’s seen the asset class with macro-trends in the five years the fund has been running.
“We’re seeing an abnormally high correlation with macro events,” he said. “If you look back over CPI announcements, etc,…the things that have shocked the Nasdaq in either direction have typically influenced crypto over the past few months.”
Meltdowns like those of the Terra ecosystem and hedge fund Three Arrows Capital have also pounded investor sentiment, alongside the market losing more than half its value since November.
The merge
Renewed interest in ethereum comes as the team behind the $200 billion cryptocurrency set a date for the long-awaited “merge”, which will allow holders of its native crypto token to earn yield for helping to validate the network.
The software upgrade represents a fundamental overhaul in how the ethereum blockchain works, shifting from a ‘proof of work’ to a ‘proof of stake’ model, which is significantly more energy efficient.
By reducing the need for computer power, the upgrade is expected to cut ethereum’s energy use by 99.95 per cent.
Digital Asset’s Galvin said asset holders like himself will see two benefits from the migration: a reduction in price dilution and validation from transactions.
“Around 4.93 million of ethereum gets issued to miners every year, or $8 billion, which means I effectively get diluted,” he said. “You need $8 billion of new inflows for the price to be neutral. Miners have high fixed costs, so they need to sell to pay those costs, which means there’s selling pressure on the market which needs to be met with buying pressure. In ‘proof of stake’ that issuance drops around $5 billion to around $0.6 billion.
“The other difference is that instead of that ethereum getting issued to miners, they can get issued to me as a ‘staker’, which means I can participate in the inflation.”
Ray Brown of CoinSpot said the cryptocurrency exchange’s users “place strong hope” on the merger positively impacting prices, as traders bet on the upgrade attracting more developers and investors to the cryptocurrency.
“With the announcement of a hard rollout date just a week away, there are some expectations from Aussie investors that prices could rally and stay strong,” he said.
“If the merge does pave the way to a more efficient, cost-effective and decentralised method of issuing and executing smart contracts, investors and businesses will have a compelling reason to increase their support of the ethereum blockchain.”
There are many unknowns about the ethereum merge, slated to take place between September 10 and 20, with some likening it to the Y2K scare. Coinbase Global, the largest US crypto exchange, will pause withdrawals and deposits of all ethereum-based tokens “as a precautionary measure”.
Mr Galvin said there are risks when such a substantial change is made, but he isn’t concerned, adding the risks surrounding the upgrade mean the benefits aren’t priced in.
“We have a lot of faith in the development community in ethereum and the program they’ve gone through to test it, but it’s not 100 per cent certain,” he said. “If it goes well, you’d expect the reduction in risk should lead to potential price increases.”