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The approaching Merge of Ethereum (ETH), the second-largest blockchain, will be a significant milestone, and speculation over its potential effects has been roiling the cryptocurrency markets for the past month. The crucial question is how the switch to a proof-of-stake system, which is meant to be faster and uses less energy than the existing proof-of-work protocol, will affect the price of ether and related digital assets.
And as the event, anticipated to happen next month, draws closer, the market story keeps changing.
The sharp decrease in ether's price on Friday coincided with a quick decline in open interest on derivatives, contracts that traders used to make leveraged bets on the cryptocurrency's future value, according to a weekly report from the data provider Kaiko. According to Kaiko, many traders had their derivatives trades canceled or lost due to margin calls.
However, the data source discovered that cash poured back into the ETH futures market on Monday.
“We witnessed a big jump in open interest as the price went below $1,600,” Kaiko noted.
On perpetual ether contracts, which resemble commodity futures contracts but have no expiration dates, there has also been a lot of volatility in the financing rates. The funding rates fell along with the token’s price until rising to around neutral levels.
According to Kaiko, “it looks these new holdings in ETH futures are skewed long, and investors are bullish at these price levels when combined with the rise in open interest we noticed this morning.
The proportion of ether in the weekly combined trading volume of ether and bitcoin reached 57%, the highest level since 2018. The previous peak of Ethereum trading, which occurred during the crypto selloff in May 2021, was 55%.
“Increased confidence about the Merge and an improvement in the perception of risk around the world have been the primary drivers of ETH trading activity in July. But the market selloff last week has proven that ETH is still a higher beta option,” Kaiko noted.
There is a lot of conjecture that many Ethereum miners may strive to maintain support for the blockchain’s current proof-of-work system, which is identical to Bitcoin’s. As the Merge draws near, Ethereum Classic (ETC) and ETHPOW – based on a new, hypothetical fork that might occur – have been suggested as potential options.
Kaiko claims that Ethereum Classic has surpassed other forks like Bitcoin Cash, ETH, and BTC. The token, however, has reversed its gains, dropping more than 20% during the previous week.
In the meantime, the price of ETHPOW has decreased by more than 60%, from a peak of $140 at the beginning of August to about $50. After the token’s first week of operation, the daily volume fell by 66% as traders’ interest waned.
While traders continue to have certain fears about the Ethereum Merge, such as more delays, a poor transition, and rival proof-of-work forks, Arca Research Analyst Nick Hotz claims that most of them are exaggerated.
According to Hotz, nine “shadow forks” and three Ethereum testnets (Ropsten, Sepolia, and Goerli) have successfully merged. “Many of the testing glitches were caused by the fact that these tests were not representative of the real Ethereum merge, whereas the genuine Ethereum merge probably would have gone without a hitch.”
The Merge will occur after Ethereum reaches a particular total terminal difficulty (TTD), or the amount of computer power allocated to the network. The Merge is now anticipated to occur around September 15.
No matter what happens, Ethereum will convert to proof of stake when the TTD is reached, according to Hotz.