Crypto Market Forecast: Midweek Update 15th September

• The price of Bitcoin (BTC) has dipped by a significant ~9.2% following the release of a hotter-than-expected inflation report in the United States. The price of the asset currently trades for ~US$19,800.

• A Tuesday report for August published by the US Bureau of Labor Statistics indicated that the Consumer Price Inflation (CPI), which tracks a wide range of goods and services, rose by 0.1% month-by-month and by 8.3% for the year.

• Economists expected headline inflation to drop by 0.1% so the increase was a surprise. The CPI rate impacted optimism amongst investors that the Fed may slow down interest rate hikes because of a cooler economy. It also means that consumers continue to suffer because of high prices.

• Alongside the slide in crypto markets, stock indices also tumbled. The Dow Jones, the S&P 500, and the Nasdaq composite were down by 3.9%, 4.3%, and 6.3% for the day following the CPI report. Large tech stocks like Meta and NVIDIA were amongst the biggest losers.

• The correlation between the price of Bitcoin (BTC) and major US stock indices has risen in recent weeks. This suggests that both markets are being shunned by investors who have inflation concerns and are turning risk-off.

• Higher inflation rates will likely lead to higher interest rates in the United States and globally. This increases the appeal of saving and decreases the appeal of investing. The dollar index conversely had its biggest percentage day gain since 2020 following the CPI print further indicating that investors are flying to safety.

Altcoin Watch

• It has also been a difficult week for altcoin markets with investors turning risk-off and dollar strength pushing towards safer investments. Ethereum, despite the Merge upgrade which is set to occur today, is down 10.3%.

• An asset that has absorbed the bearish pressure more strongly than others is Ethereum Classic (ETC) which is down a comparatively mellow ~3.2% and is up ~5.4% in the last day.

• According to data from mining pool 2miners, the hashrate of Ethereum Classic is up ~200% in the last 30 days. Ethereum miners who will now be homeless following the transition from Proof-of-Work to Proof-of-Stake are making the move to Ethereum Classic which uses very similar software to pre-Merge Ethereum.

• During the recently concluded Ethereum Community Conference in Paris, Buterin invited the ETH community to use ETC if they prefer PoW. He called it “a totally fine chain.”

What we’re looking at: The Merge is almost upon us

The Merge is almost upon us. Everyone from Google to the CEO of Stripe is celebrating the upgrade.

The Ethereum foundation states that the Merge will be “the most significant upgrade in the history of Ethereum.” It will witness the largest platform blockchain move from Proof-of-Stake to Proof-of-Work. The shift has significant implications for the supply of the Ether token and the environmental impact of the Ethereum blockchain.

A common misconception is that it will make Ethereum immediately cheaper and faster. This is not the intention of the upgrade. It is a change in how the network is secured and is designed for scalability. There are no expectations from Ethereum developers that gas costs will drop straight after the Merge is implemented. More info here.

The Merge will witness the joining together or ‘merging’ of the execution layer, Ethereum as we know it today, with a consensus layer called the Beacon chain.

What has many investors excited is the price implications of the Merge. The Merge is set to be a major supply shock for the Ether token. Since the network is now PoS, a chunk of ETH will be illiquid because it will be locked in high-yield native staking. There will also be a halving-type effect because PoS validator rewards are much lower than PoW miner rewards. The inflation rate of ETH is set to drop sharply. These factors combined with Ethereum’s new environmentally friendly narrative, layer-2s emerging, and the existing fee burn mechanism present bullish tailwinds for ETH.