The update of the Ethereum network (The Merge) profoundly changes the history of the cryptocurrency market. In this context, it will be interesting to note a possible evolution in the behavior of the price of the second world cryptocurrency. Indeed, the scale and significance of the change underway leaves before us great future advances in the cryptocurrency market. Throughout this publication, we will first see the statistical characteristics of the behavior of ethereum (ETH). Next, we will consider possible structural changes to the behavior of the world’s second cryptocurrency. Indeed, updating the network changes the market outlook. Deciphering the characteristics that determine the price of ethereum (ETH) and possible changes to come in the behavior of the price…
Ethereum price and statistical behavior
The price of ethereum (ETH) is significantly more volatile than the price of its competitor bitcoin (BTC). Indeed, the variations of ethereum over a long period are wider and more significant than on bitcoin. Thus, the monthly volatility measured on ethereum (ETH) amounts to nearly 45% between September 2016 and September 2022 (6 years). For comparison, the monthly volatility of bitcoin (BTC) stands at 23.4%. That is, the price of ethereum is up to twice as volatile as the price of bitcoin, which is otherwise significant.
Also, it is important to specify that the weekly volatility of the price of ethereum amounts to 15.8%. Which is significantly high. Additionally, the average weekly performance of Ethereum is +2.75%. As a result, more than two-thirds of ethereum’s weekly swings take effect between -13% and +18.5%. Through these data, we can clearly see that high volatility on a relatively short time scale quickly makes irrelevant to the study of probabilities.
Volatility of ethereum: what causes?
In any case, the very volatile nature of ethereum can be explained for multiple reasons:
- First of all, Etherem is a reference (a kind of “standard”) of the cryptocurrency market. The ETH network is used for the development of many applications as well as exchanges on the NFT market and others. In this sense, any growth in the cryptocurrency market as a whole “boosts” the performance of ETH. In the opposite case, a crisis and a depression of the market immediately translates into an amplification of the declines of ETH.
- Second, Ethereum is not issued in a fixed quantity and does not have a deflationary character as is the case with Bitcoin (BTC).
- Finally, ETH enjoys the position of the second largest cryptocurrency in the world. This implies that the popularity of cryptocurrency and its utilitarian nature inspires a certain confidence specific to the ecosystem. As a result, phases of depression or euphoria are amplified by speculation.
ETH and market fractals
In our previous publication about bitcoin and fractals, we showed several characteristics. Study of fractals on bitcoin (BTC) – Tremplin.io. First of all, bitcoin appears to be an extremely time-sensitive asset. In other words, the time of occurrence of high points or low points is an almost exclusively decisive criterion on the prices of the world’s first cryptocurrency. The question that should be asked is whether the price of ethereum is significantly affected by this observation.
Without going into the details of the calculation (see previous publication), we will seek to calculate the “fractal” character of ethereum. The presence of a fractal character for the price of an asset reflects the ability of price variations in the short term to generate similar variations in the long term. In his works, Benoît Mandelbrot, the originator of the study of fractals, spoke in particular “relative self-strength” to write the mechanics of fractals. In the case of ethereum, we know that the weekly volatility is 15.8%. Thus, at the same time, the monthly volatility amounts to 44.7%.
Measurement of Fractals
We deduce the value of the Hurst coefficient (the closer the coefficient is to 1, the more important the fractals are):
- The weekly volatility is 15.8%.
- In theory (rate stationarity and independence from time), the monthly volatility therefore amounts to 31.6%. (We multiply the weekly volatility (15.8%) by the square root of the number of weeks in a month).
- However, we observe that the monthly volatility is not 31.6%, but 44.7% as indicated above.
- The value of the Hurst coefficient is therefore 0.75! The value of the coefficient is greater than 0.5 which reflects the dependence of ethereum on time. Also, this value is close enough to 1 to say that ethereum is an asset determined by precise cycles. In the (optional) detail of the calculation, we have ln(44.7/15.8)/ln(4)=0.75.
ETH: a cyclical asset?
The same methodology applied between monthly volatility and annual volatility even shows the presence of a Hurst coefficient greater than 1. This means that the price of the world’s second largest cryptocurrency is largely dependent on weather and cyclical dynamics. The converse is that the study of the temporality of ethereum is very relevant, while the study of probabilities is largely flawed with regard to the amplitude of the volatilities and the cycles in question.
In a previous article, we discussed the case of interference on ethereum. As a reminder, an interference is the combination of two cycles which generates a maximum, a minimum, or a price stagnation. In the case of the cycles that we have represented (4 and 22 months), the study of the cycles is very relevant. The two cycles were synchronized on a peak in January 2018, which implies the presence of a maximum. Then, both cycles entered destructive interference (price neutral) at the end of 2019, which resulted in a low.
The next peak (constructive interference) suggested by the model was in October 2021, which has been confirmed. The next destructive interference is expected to take effect around mid-2023 on ethereum.
The Merge: what changes in the price of ethereum (ETH)?
The major question in the eyes of many investors is whether The Merge will have any real consequences for price behavior. Indeed, this is the biggest update ever to a Blockchain network. This not only impacts the organization of miners, but also the behavior of buyers and the ecosystem as a whole.
The Merge: A Crypto Revolution?
The network update, now effective, is causing a lot of ink to flow within the crypto community. Indeed, this update has many advantages, but also disadvantages.
- First, The Merge improves network efficiency.
- In addition, a major and quite recognizable advance is the reduction by 99% of the energy consumption of the Ethereum network. It would even reduce the 0.2% global electricity consumption. The energy cost was a main drawback to the democratization of cryptocurrencies. This therefore folds the cards in the future.
- The transition from PoW to PoS has the effect of randomly selecting the miners who will validate the blocks. Thus, miners who have invested in high-performance hardware to ensure that they resolve transaction validation as quickly as possible will see their profitability decrease.
- However, The Merge should not significantly change the number of transactions per second. As a result, transaction fees (considered high overall) should not change. Despite everything therefore, the financial costs to feed this network should remain similar….
- Moreover, some authors have insisted on the network centralization risk and the latter’s risk of corruption. Although this risk is considered minimal by Ethereum, the presence of many malicious miners on the network could be enough to corrupt the latter. Otherwise, there is a centralization of network hosts as well as candidate minors around certain regulations.
From past behavior to current behavior
Throughout the previous data, we reiterated the essentially volatile nature of ethereum. In addition, the price of the second planetary cryptocurrency experiences large variations, much greater than that of bitcoin. It is important to point out here that bitcoin (BTC) is already among the most volatile assets in the world. Also, it is important to measure the sensitivity of the price of ETH to time. This sheds light on whether, after all, ETH is a cycle-determined asset. We already knew that bitcoin (BTC) was a very fractal asset, but it appears that ethereum is even more so.
Since entering the new PoS network on Thursday, September 15, Ethereum price did not experience any abnormal price movement. As of today, the ETH price stands at $1,460. The previous all-time high was reached in November 2021 at $4,800. Thus, two scenarios stand out:
- If democratization accelerates due to better performance and energy cost, then ETH should see its price increase in the long term.
- If the network adapts to the development of various applications (DeFi…) and if this improves the integrity of transactions, the price of ETH would be increased as the growth of NFTs, decentralized finance and others should encourage the use of Ethereum.
- Nevertheless, if the risks of network corruption prove to be real, for malicious, regulatory or hosting reasons, then the stability of ETH would be undermined.
Ultimately, we have shown that the ethereum price has a mainly volatile behavior. The arrival of the network update congenitally modifies the perspectives of evolution in the future. This detailed statistical study will allow us, over the next few months, to draw conclusions about the effect of The Merge on the price of ETH. Moreover, we have seen that the volatility of ethereum is even up to twice that of bitcoin on a monthly timescale. Which is quite significant and makes any study of probabilities sterile.
Therefore, the study of fractals shows otherwise interesting characteristics. We already knew that bitcoin was a very sensitive asset to fractals. It is all the more astonishing to see that this observation is even more true for ethereum. To some extent, it can be written that the only determinant of the price of ETH is the time factor. The probabilities themselves, and the inherent randomness of cryptocurrency movements, are almost non-existent in the short term, and totally absent in the long term. As a result, the study of cycles on ethereum becomes absolutely central. The example of the study of cyclical interference demonstrates the high temporal precision of price movements.
Finally, the question arises whether the update that has been in place for only a few hours will have a long-term impact on prices. There are undeniable and considerable advantages of this update. However, some remain circumspect about the potential generated by The Merge. The risks of network corruption, regulation of validators, insecurity of hosts are particularly pointed out. But these risks should be very limited, says Ethereum. The major advantage lies in the considerable reduction of energy consumption on the one hand, as well as the improvement of the efficiency of the network on the other hand.
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