The Ethereum blockchain is working towards transitioning from being a proof-of-work blockchain to using a proof-of-stake consensus mechanism. The merge, as the point at which this permanent change will happen is dubbed, is going to benefit Bitcoin as well according to a new analysis.
The Ethereum merge will decouple crypto from equities
In a report named “The Decoupling Thesis,” Messari’s senior research analyst Tom Dunleavy argues that the Ethereum merge will likely be a major turning point in the economic outlook of investors.
He notes that in the past, Bitcoin and Ethereum – the crypto market leaders – have had strong positive correlation with the broader US stock market. The correlation between the two cryptos and the Nasdaq and S&P 500 index has ranged from 40-50% for longer periods and around 90% for shorter periods.
In contrast, assets like gold and U.S. government bonds have historically been negatively correlated with stocks. At present, however, this negative correlation has been getting weaker. Both gold and bonds crashed along with stocks during the 2020 market downturn that was brought on by inflation.
Based on this trend, Dunleavy maintains that with inflation persisting, gold and bonds become less attractive. This is where staking Ethereum in a PoS system will work wonders for the market.
Post merge, ETH is going to become a quasi-government bond. Stakers will put up capital in exchange for returns at a set schedule like a bond principal. This will also solidify Bitcoin’s position as digital gold.
A regime shift to a new environment with a higher persistent level of inflation makes bonds & gold less attractive. The Ethereum merge creates conditions for ETH as a quasi-government bond further solidifies the narrative for Bitcoin as digital gold, Dunleavy said.
The merge is also expected to usher in the “flippening”
Previously, Messari predicted that 2022 will see the broader crypto market decouple from global markets. The market intelligence provider noted that various sectors of the crypto market will continue to gain more traction.
While the Ethereum is highly anticipated to happen this year, there is no set date yet. However, the developers of Ethereum are reaching milestones on the journey to it.
Meanwhile, sentiments that the merge will push Ethereum above Bitcoin continue to persist. Speaking to Reuters, Noelle Acheson, head of market insights at Genesis Trading, opined that post-merge more funds will find their way to Ethereum.
On the day ETH is trading at around $2,850 with a market cap of $343.98 billion, while Bitcoin is trading at around $38,200 with a capitalization of $726.69 billion.