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Despite the aggregate crypto market’s relatively sluggish start to 2022, Ethereum’s on-chain metrics look incredibly good. The utility and adoption of Ethereum have picked up the pace over the past few months, with rising capital inflow and on-chain activity.
With undervalued fundamentals and a current price far from all-time highs, you may be wondering if it is the right time to buy the dip before Ethereum enters the next bullish rally. The following discussion investigates what the on-chain data suggests about Ethereum’s outlook for the near future.
What is the ETH Merge?
Sometime later this year, the most important commercial highway in cryptocurrency is about to be completely repaved and redefined. Namely, Ethereum is set to make the biggest change in its near-decade history, an event that will undoubtedly ripple through the entire ecosystem of digital assets and cryptocurrencies. According to a report by Bloomberg Intelligence, Ethereum’s upcoming Merge upgrade will move the Ethereum network from a proof-of-work (PoW) consensus algorithm to a proof-of-stake (PoS) one where network validators can verify transactions and stake their assets.
The change from PoW to PoS is called the Merge because the already running beacon chain will merge with the existing Ethereum mainnet chain. This transformation preserves the history of the network and its functionality while changing the consensus mechanism. At its core, the Merge to PoS will reduce network energy usage by at least 99.95%. Currently, the network has a carbon equivalent equal to the entire nation of Finland, and the core developers understand that the Ethereum network needs to improve. Other benefits of the Merge include:
- The system will gain long-term scalability and sustainability.
- PoS makes participating in the network more accessible for many users, not just large miners.
- More equal distribution of network rewards to incentivize good behavior opens up yield to more users.
- The lack of mining will cause Ethereum’s overall coin supply to dwindle, which should push up its price.
Should You Buy the dip?
On-chain analysis is a vital tool that you can use to seperate the speculative value of a cryptocurrency from its utility value. Currently, Ethereum’s on-chain data suggest a bullish narrative, with many metrics flashing potential buy signals.
Ethereum Exchange Reserve — all Exchanges:
In the graph above, Ethereum’s exchange reserve was in a strong downtrend through January 2022, with a notable decrease in the last few weeks. This sign indicates lower selling pressure on exchanges. Exchange reserve refers to the total number of ETH held on exchanges.
Generally speaking, price trends move in an opposite direction to exchange reserves. As a result, all other things being unchanged, further decreases in exchange reserves should contribute to positive price action for Ethereum in the near future.
In this chart from mid-June of 2022, data shows that the reserve continued its downward trend while the value of the token itself bottomed out. Yes, you could blame this on issues created by the unpegging of stablecoins elsewhere in the marketplace, but Ethereum seems to have continued a slide that started long ago—in spite of market indications to the contrary.
The Taker Buy-Sell Ratio as a MACD Wave:
Source - DeFire Academy
The graph above represents the taker buy-sell ratio (an indicator that measures the volume of buy orders and sell orders) as a MACD wave.
Ethereum is in a buying phase, last seen in early 2021 before the 2021 bull market. Data indicates that buy orders are currently prevailing, suggesting that smart money is buying the current dip in anticipation of higher prices. This trend may be a reason to dollar cost average the dips; however, further downside is still plausible.
With the ETH Merge just around the corner, it seems as if it is only a matter of time before ETH experiences a positive catalyst. Even if the broader market stalls in the medium-term, ETH might have a rally of its own.
Increased ETH 2.0 Staking Inflow:
Source - DeFire Academy
As observed by the upward-trending ETH staking rate in the figure above, the value locked in Ethereum is rapidly rising. Additionally, more outflows in ETH supply are being locked up in the ETH 2.0 staking contract. This ETH can’t be sold in the near future, which means less supply can be bought.
Additionally, following the Merge, the amount of ETH issued is projected to drop by 90%, which would lead to similar levels of fees to reduce Ether’s supply by as much as 5% a year. The graph below presents ETH issuance, which should drop below 5,000 Ether post-Merge.
Overall, a reduction in coin supply in the short term paints an overall bullish picture for the Ethereum ecosystem.
As the Merge draws closer, the hype surrounding the Ethereum network continues to magnify. While the upgrade may still bring about powerful and positive changes to the Ethereum network, it is important to acknowledge that cryptocurrencies are inherently risky. Negative macroeconomic events that impact the broader cryptocurrency market may offset Ethereum’s bullish upgrade.
In the meantime, it may be appropriate to dollar cost average the dips if you are convinced that Ethereum is undervalued based on its fundamentals. If the merge is successful, Ethereum may be one of the most popular crypto assets for institutional investors for the foreseeable future.
Frequently Asked Questions
When is the Ethereum Merge date?
The Ethereum Merge date has changed several times, but it is currently scheduled for August of 2022.
Is Ethereum undervalued?
Some people believe Ethereum is undervalued, but remember that it does not have scarcity built in like Bitcoin, keeping its price lower than some believe it could be.
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