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Even when Ethereum was first considered in 2015, creator Vitalik Buterin had the foresight to see that scalability and security would become an issue if the project really took off. In 2022, seven years later, Ethereum has become the second largest cryptocurrency and is certainly experiencing scalability issues. At the end of 2021, at the height of the bear market, transaction costs on the Ethereum chain were consistently above $10. Fees for complex transactions at peak times even reached several thousand dollars in some cases. Fortunately, Buterin and the rest of the Ethereum developer community could see this coming a long way and planned to fix the issues. This is the goal of The Merge: a big step towards the overall goal of optimizing the Ethereum chain.
Should you buy Ethereum before the merger?
The merger could have several impacts on the price of ETH. If The Merge goes well, the price could rise. If it ends badly, the price may drop. The merger could already be priced in and not much would change after the actual event. It is also possible for ETH to crash even if The Merge goes smoothly if community expectations are set too high.
Your personal verdict on buying ETH before The Merge mainly depends on the benefits you think it offers users.
What is Ethereum Merge?
The upgrades planned by Buterin in 2015 were initially coined ETH 2.0. This name was dropped after leading people to believe that it would be an all new network instead of a set of drastic upgrades. It is now known by its three building blocks: the launch of the Beacon chain, The Merge, and sharding.
The context of The Merge is quite important. This is the second in a three-step plan to create a better version of Ethereum. The first step was the release of the Beacon Chain in December 2020. The Beacon Chain is currently running alongside Ethereum and is being used to test the new consensus method (Proof of Stake or PoS).
Fusion is exactly what it sounds like. On merge day, the Execution Layer (the current mainnet) and the Beacon Chain will merge.
The final upgrade – called sharding – is expected to be released in 2023. This upgrade will disperse data storage across the network, allowing for more efficient data storage. It can also reduce transaction costs and increase speeds.
How will the merger affect Ethereum?
The immediate impact of The Merge will above all be that of consensus. Currently, Ethereum uses a Proof of Work (PoW) consensus model. This method involves validators using powerful computers to solve mathematical problems and earn the right to validate transactions. The main issues with PoW are the lack of validators due to high entry costs and power consumption. Currently, the Ethereum network requires an amount of energy comparable to the whole country of the Netherlands.
Replacing PoW with PoS has another great benefit other than reduced power consumption. Validation on a PoS network is much less capital intensive than on a PoW chain due to hardware and electricity costs. After the merger, Ethereum issuance will be reduced by around 90%, which should make it almost permanently (or almost) deflationary with the help of the previous EIP-1559 update. This may be the most important factor in deciding whether to buy Ethereum before the merger, as it is likely to have a significant impact on the price of ETH in the long run.
Merging with the Beacon Chain will allow Ethereum to validate using PoS. This method involves validators staking their tokens on the chain in exchange for the ability to validate. By staking, validators are incentivized to validate correctly as the chain can confiscate their holdings for errors and give rewards for accuracy. This method is estimated to use 99.95% less energy than the current system, according to the Ethereum organization.
How to trade Ethereum merger
While anything is possible, fundamental analysis of major events like The Merge can provide useful insights. By looking at the possible outcomes of The Merge, it is possible to predict how the price of ETH might change.
If The Merge is successful and provides benefits to Ethereum users, the price is likely to rise. The added benefit could cause investors to flock to the asset and push the price up.
If the merger fails (data is not transferred correctly to the Beacon chain), investors could sell their positions. This would show underlying issues with Ethereum that could impact usability.
Finally, some believe that The Merge is already integrated with Ethereum. Since the Ethereum Foundation has been quite transparent in terms of timing and logistics, The Merge will not necessarily bring something new to investors that they are not already aware of. As such, the day of the merger might provide little movement for the price of ETH.
How to buy Ethereum
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When is the Ethereum merger?
The Ethereum organization has stated that there is a soft deadline of September 19, 2022 for The Merge. However, it looks like it will happen much sooner. The current estimate is September 15, 2022, around 01:00 UTC, based on when Total Terminal Difficulty (TTD) reaches a certain level.
What’s next for Ethereum?
The merger will essentially only change Ethereum’s consensus mechanism. However, this change will pave the way for other changes that will have a greater impact on the user experience. Sharding is the major update planned to follow The Merge.
Sharding will more evenly distribute data storage and validation across the network. The base of the share upgrade is already mostly built into the Beacon chain. There are still many hurdles for the Ethereum Foundation to overcome before sharding can be fully implemented.
Sharing will reduce transaction costs and increase speeds on the network. The merger is unlikely to significantly affect transaction costs or speeds; this paves the way for sharing to help evolve the network (with consensus change of course).
So should you buy Ethereum before the merger?
The Ethereum merger will change the Ethereum network. Whether or not to buy Ethereum before The Merge depends largely on your view of The Merge. If you see that it succeeds and provides benefits to users, it might be worth buying. Conversely, if you see it failing or worsening the user experience, selling or shorting could be ways to bring your trading in line with your opinion.
Either way, a decision on how to trade the Ethereum merger ultimately comes down to your opinion of how you see the merger unfolding.