ETH Merge: What to Expect
Have gotten some questions about how people are trading the Merge, and what to look out for, so below is a quick overview of all things Merge. If you aren’t up to speed on what it actually is/does for Ethereum, you can read more about it here. Please note that (1) nothing here is financial advice or a recommendation, and (2) the ETH upgrade could have technical issues (although most think the probability is quite low given the testnet upgrades went well). The TLDR is (1) expect volatility, (2) you don’t need to do anything, as the upgrade to PoS will be seamless from a token holdings / user interface point of view and (3) the ETH PoW work fork equates to a ~1.9% airdrop for all ETH (mainnet) holders (CEX holders may not be eligible).
Let’s start with timing - the date for the Merge is currently estimated to be September 14-15th, so we are now less than a week away:
Its crucial to note that for your crypto positions + user experience, nothing should change at all as part of the Merge- you don’t need to do anything. Everything I lay out is more what to expect during the upgrade. Doing nothing is obviously both the safest and easiest course of action, so if you don’t want to take any risks or hassles, it will seem like any other day in crypto.
Also note that centralized exchanges will likely halt withdrawals (and maybe deposits) ahead of the Merge, so don’t be surprised if you see that happen. And of course there will certainly be price volatility around the event (and US CPI is scheduled for 9/13).
But the real source of chaos will come from the ETH PoW fork. For background, given ETH is currently a PoW network, its transactions rely on miners → the transition to PoS is forcing them to find a new home for their mining equipment (which can’t really transition effectively to BTC based on my understanding). So some of the miners will be “forking” ETH, and will airdrop PoW ETH to all ETH holders. Currently, based on trading markets for PoW ETH, it will shake out to a ~1.9% airdrop.
Given not all centralized exchanges will be honoring the ETH PoW airdrop, if you want to receive the token, you need to hold ETH on Ethereum mainnet. It sounds like ETH on any other chain (including L2s) will not be eligible and given it may take time for the CEX markets to get up and running for PoW ETH, the best course of action (if you want the airdrop) is to hold spot ETH on mainnet.
For onchain tokens paired against ETH, you will see some liquidity providers potentially pull their LP to be holding ETH for the airdrop + they may sell their other side of the LP for ETH to receive the airdrop (and then re-LP post airdrop). This could cause a liquidity crunch in already a low liquidity market, so be prepared for volatility. Also be on the lookout for liquid staking ETH discounts: given holders of a token like stETH will not be eligible for the PoW airdrop, you may see holders sell into ETH, which could exacerbate current discounts (and then buyback stETH).
Look out for scams: There will undoubtedly be other real and fake airdrops around the Merge date, so be careful with what sites you interact with (best course of action here is don’t touch anything, other than the official PoW ETH fork if you want the airdrop). Additionally, given everything on the ETH network as it exists today will exist on the ETH PoW fork, there will be “2 of everything” essentially. 99.9% of whatever non ETH token or NFT you are holding will be worthless on the PoW chain (and there won’t be any liquidity), so don’t fall for any scams or links that try to take advantage of this confusion. In my opinion, some NFTs may end up having value down the road on PoW ETH, driven by the narrative of it being on the “OG Chain” but for our purposes, assume it will all be worthless.
The last thing to monitor is the PoW ETH chainid situation / Replay Attacks.
If you plan on doing anything on the PoW ETH chain, you need to be very careful. Essentially, it seems that PoW ETH will use chain id 1, which opens you up as a user to potential “replay attacks”. You can think of a replay attack as taking a transaction from one network, and using it on another. For example, if you sent someone 10 ETH on PoW ETH after the Merge, replay attacks could repeat this transaction on ETH PoS. As such, interacting with PoW ETH is dangerous if the chainid is not changed. If you are going to interact with the chain to do some degen stuff or sell your PoW ETH, its probably prudent to use a fresh wallet.
How To Trade / Position for the Merge
I’ve seen a few good trade ideas that folks have come up with around the Merge, which I’ll outline below (again, not recommendations). Please note that there are risks involved in some of these, and that ETH may even fall post merge, so be responsible
Hold spot ETH, hope price goes up + receive airdrop
Buy ETH call options, if you think the price moves much higher next week into the event (and with hopefully an accommodative CPI release Tuesday). For example, ETH $1,700 calls expiring on 9/16 are currently going for ~$92, so a pump to $2k on the combination of cooling CPI + Merge catalyst would net you a little over a 3x
Hold alts, and hope they act as levered beta to ETH
Max borrow ETH - this is a popular one, which led to AAVE stopping all ETH loans ahead of the Merge. Institutions are definitely putting this trade on, to borrow ETH at decent APY, receive airdrop, and then unwind.
Buy discounted stETH - as mentioned, discounts for stETH will likely widen into the Merge, so folks are watching this to potentially buy at depressed prices, which will hopefully normalize over time
Go long volatility: use options strategies like a straddle for next week to profit off extreme movements upward or downward.
The other institutional play that I’ve seen mentioned is shorting/borrowing spot ETH, and going long ETH perps. Speculators in this strategy (1) receive funding on their perp, (2) pay a little borrow cost to borrow ETH and (3) will receive the ETH PoW airdrop from the ETH they borrowed.
Summary:
In closing, the transition to PoS (if successful) will be seamless from the end user perspective, so you don’t need to do anything. The PoW airdrop will cause some chaos, including liquidity squeezes in certain onchain tokens + general volatility. And there are plenty of interesting ways to position for both ETH’s performance and for the airdrop. Look out for airdrop and other scams around the PoW, and be careful using PoW ETH chain given the risks involved. We will find out in just a few weeks if this was a “sell the news” event or not. As always, feel free to drop any comments or questions below + any recommendations of things you’d like me to cover.
As always love the in depth analysis and the different strategies to trade it! Be really interesting to know if you have any positions on following any of the 7 strategies you listed?