Market Commentary
Market Commentary: Spotlight
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September 13, 2022

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After many years, the countdown begins: Ethereum's milestone shift to proof-of-stake is in the “spotlight” this week with its upgrade expected to occur around September 15th.

Key Takeaways:

  • After many years of anticipation, Ethereum’s milestone shift to proof-of-stake will occur this week, around September 15th
  • We offer key takeaways of Ethereum’s upgrade and highlight a two-pager published on this transition, distributed last week
  • We discuss a record amount of staked ether as a “vote of confidence” and bitcoin’s “catch up” to ether’s outperformance as “traders trade” ahead of the Merge


After many years of anticipation (Ethereum’s potential shift to proof-of-stake was first mentioned before its launch date) Ethereum’s milestone shift to proof-of-stake will occur this week, around September 15th.

While digital asset markets have been heavily focused on the macro story for much of the year, this crypto-narrative has been a nice “change from the norm” and has led to significant ether outperformance since the digital asset lows on June 18th.

Supported further by “signs” that digital assets can outperform on improved macro conditions, it’s certainly been a better few months for digital assets than earlier this year.

Now, the countdown to the Merge begins.

As outlined in a two-pager to our readers last week, Ethereum’s Merge promises some significant benefits. These include:

  • ~99% less electricity use than proof-of-work, which makes Ethereum more ESG-friendly
  • ~90% reduction in new issuance, which makes ether less inflationary and potentially deflationary in periods of high network activity, when combined with its buyback mechanism
  • Cash flows in the form of staking rewards, in which stakers receive ether for approving transactions
  • Brings Ethereum one step closer to faster and cheaper transactions, although not yet (this comes with the next steps, The Surge and The Verge)

And so, this is a very exciting moment for digital assets. A major upgrade to the second largest asset by market-capitalization and the largest smart contract platform is one of the largest events in digital asset history.

So, what will happen during and after the Merge? Where do we go from here?

Well, during the Merge, which will occur when mining difficulty reaches a certain level, investors need not do anything. The already running Beacon Chain will take over the process of validating new transactions, and the full history of Ethereum will be merged with the new chain. The upgrade is then complete. Some key takeaways headed into the Merge:

  • Volatility may occur, but it also might not: there is always risk of “buy the rumor, sell the news”, particularly after such strong performance from the lows. However, digital asset investors are no stranger to volatility, which should be taken in stride. Long-term investors should let “traders be traders” and consider the significance of this shift in the big picture.
  • That being said, some downside is “priced in”: ETH futures on the CME for September 2022 have traded around $1,700 versus Monday’s spot closing price of $1,724, while perpetual swap traders on crypto exchanges are paying anywhere from 4-6% annualized to be short ether.
  • Eyes on the “flippening”: The digital asset community has discussed the possibility of ether surpassing bitcoin’s market cap for quite some time now. Only time will tell, but if so, this does not change the thesis for bitcoin, an emerging asset tied to the evolution of money. While Ethereum is a play on the digital asset ecosystem, bitcoin is a monetary asset with a much larger and more significant total addressable market. As such, investors should own both of these complementary assets in tandem to take advantage of both opportunities.

In other news, CPI came in slightly hotter than expected (although still decelerating), supporting the recent “higher for longer” narrative across Fed expectations.  SEC Chair Gary Gensler again reiterated his belief that many altcoins are securities, Fed Chair Powell reiterated his fight against inflation, and the White House distributed a report on bitcoin’s electricity use (which includes risks, opportunities, and even legitimization of not just bitcoin, but alternative mining).

On page two, we discuss a record amount of staked ether as a vote of confidence in the Merge and discuss a pullback in ether’s outperformance as “trader’s trade.”


With increased excitement around the Merge, a record 13.6 million ether (~24bn USD) has been deposited to the Beacon Chain.

A growing amount of staked ether reflects a vote of confidence in the transition from proof-of-work to proof-of-stake, as staked ether remains locked until 6-12 months after the Merge is completed.

While the eventual unlock may introduce some selling pressure, there is certainly incentive to remain staked: those that stake are estimated to receive 4-8% in cash flows per year, depending on the amount of transactions and the total amount of ether staked on Ethereum.

This, alongside a reduction in electricity use and ESG-friendly characteristics, opens the door for further institutional investment.


Some de-risking ahead of Ethereum’s merge date has begun to take place, with many traders selling ETH for BTC and taking profits after the strong outperformance since the announcement of a Merge date.

Bitcoin, perceived as a “safe-haven” within digital assets, gained 8.7% last week, rallying to $21,641 by Sunday’s close, per Bloomberg. This performance continued on Monday, with a gain of 3.6% to $22,402 while Ether pulled back 2.0% to $1,724.

As a result, the ETH/BTC pair has declined from a high of 0.084 on September 7th to now 0.077 by Monday’s close. As we’ve written recently (here and here), bitcoin was likely to “catch up” after strong narrative-driven ether outperformance.

While Ethereum has taken much of the spotlight as of recent, don’t forget about bitcoin, the emerging monetary asset tied to the evolution of money. Last week’s gain of 8.7% was the best performance for bitcoin since March of 2022.

Click here to download full report. As always, please reach out with any questions or comments.

Stay tuned,

Joseph Orsini, CFA, CMT
Vice President of Research

Investment advisory and management services are provided by Eaglebrook Advisors, Inc., a registered investment advisor. Information presented is for educational purposes only. Past performance is no indication of future results. Please see our Form ADV Disclosures and Privacy Policy in our website.
Price Volatility of Digital Assets – A principal risk in trading Digital Assets is the rapid fluctuation of market price. High price volatility undermines Digital Assets’ role as a medium of exchange as consumers or retailers are much less likely to accept them as a form of payment. The value of client portfolios relates in part to the value of the Digital Assets held in the client portfolio and fluctuations in the price of Digital Assets could adversely affect the value of a client’s portfolio. There is no guarantee that a client will be able to achieve a better than average market price for Digital Assets or will purchase Digital Assets at the most favorable price available. The price of Digital Assets achieved by a client may be affected generally by a wide variety of complex and difficult to predict factors such as Digital Asset supply and demand; rewards and transaction fees for the recording of transactions on the blockchain; availability and access to Digital Asset service providers (such as payment processors), exchanges, miners or other Digital Asset users and market participants; perceived or actual Digital Asset network or Digital Asset security vulnerability; inflation levels; fiscal policy; interest rates; and political, natural and economic events.
Digital Asset Service Providers – Several companies and financial institutions provide services related to the buying, selling, payment processing and storing of virtual currency (i.e., banks, accountants, exchanges, digital wallet providers, and payment processors). However, there is no assurance that the virtual currency market, or the service providers necessary to accommodate it, will continue to support Digital Assets, continue in existence or grow. Further, there is no assurance that the availability of and access to virtual currency service providers will not be negatively affected by government regulation or supply and demand of Digital Assets. Accordingly, companies or financial institutions that currently support virtual currency may not do so in the future.
Custody of Digital Assets – Under the Advisers Act, SEC registered investment advisers are required to hold securities with “qualified custodians,” among other requirements. Certain Digital Assets may be deemed to be securities. Currently, many of the companies providing Digital Assets custodial services fall outside of the SEC’s definition of “qualified custodian”, and many long-standing, prominent qualified custodians do not provide custodial services for Digital Assets or otherwise provide such services only with respect to a limited number of actively traded Digital Assets. Accordingly, clients may use non- qualified custodians to hold all or a portion of their Digital Assets.
Government Oversight of Digital Assets – The regulatory schemes—both foreign and domestic—possibly affecting Digital Assets or a Digital Asset network may not be fully developed and subject to change. It is possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, policies or rules directly or indirectly affecting a Digital Asset network, generally, or restricting the right to acquire, own, hold, sell, convert, trade, or use Digital Assets, or to exchange Digital Assets for either fiat currency or other virtual currency. It is also possible that government authorities may take direct or indirect investigative or prosecutorial action related to, among other things, the use, ownership or transfer of Digital Assets, resulting in a change to its value or to the development of a Digital Asset.

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