This week in crypto: Ethereum on top

There have been some strange goings on in crypto this week.

The biggest story is obviously the mini market rally.

Here are the gains of the top 10 cryptos over the last seven days (at time of writing):

• Bitcoin is up 14%
• Ethereum is up 37%
• BNB is up 13%
• Ripple is up 10%
• Cardano is up 15%
• Solana is up 17%
• Dogecoin is up 13%
• Polkadot is up 16%
• Polygon is up 29%
• Shiba Inu is up 16%

The main reason for this is because US stockmarkets are up. The S&P 500 is up about 5% in 7 days and the Nasdaq is up about 7%.

According to CNBC, that’s because:

Investors are betting that stocks have reached a bottom after their steep declines this year, and as the latest round of earnings reports showed businesses are working through economic pressures better than feared in the second quarter.

And now that crypto basically just follows the US stockmarket, crypto has rallied too.

But here’s the strange thing.

US inflation numbers were higher than predicted this month (as they have been almost every month of this year). Which means that when the Fed meets on Wednesday, it's expected to increase interest rates by 0.75%, or even a full 1%.

And when the Fed increases interest rates, it usually makes markets crash.

In theory, because this rate rise is virtually guaranteed, it should already be priced in.

The “efficient market hypothesis” states that when new information comes into the market, it is immediately reflected in stock prices.

But in real life, things don’t always pan out like that. Which is why, for example when the Fed announced it was raising rates by 0.5% on the 4^th of May, the S&P 500 fell more than 8% in a week… while the crypto market fell by 17%.

So, is the rate hike priced in, or will we see another sell-off by this time next week? I have no idea, and I’d argue no one else really does either.

But it does seem strange that the market is rallying just days before an announcement that has historically caused it to fall.

The other strange thing (which you probably noticed as I bolded it) is that one major crypto is up way more than the others.

Ethereum’s time to shine

Most of the top 10 cryptos are up from 10% to 18%. Meanwhile, Ethereum is up a massive 37%.

This time it’s Ethereum dragging the market up instead of Bitcoin

Why?

Because of the meeeeeeeeeerge. Or Ethereum 2.0 as it used to be called.

I’ve written about the merge a lot over the last few months. So if you want to get up to speed, take a look here.

But basically, it means that Ethereum is moving from Proof of Work (like Bitcoin) to Proof of Stake (like most modern cryptos).

The merge brings a wealth of benefits, the most notable being:

• A 99.95% energy reduction.
• Staking rewards of around 9%-12% per year.

Ethereum 2.0 has been on the cards since before I got into crypto more than five years ago. And it’s been pushed back again and again and again.

But this time it really looks like it’s going to happen.

From CoinDesk:

The 'Merge Trade' Has Begun, Experts Say, as Ether Surges

Renewed clarity about the timeline of programmable blockchain Ethereum's highly anticipated transition to a proof-of-stake consensus algorithm, seems to have galvanized investor interest in ether (ETH). …

On Thursday, Ethereum Foundation member Tim Beiko suggested Sept. 19 as the provisional launch date for the Merge, which will see the world's biggest smart contract blockchain transition from the energy-intensive proof-of-work consensus mechanism to a more environment-friendly proof-of-stake mechanism.

"ETH has undergone a rapid change in narrative over the past week with speculators purely focused on the upcoming 'merge' as a catalyst for appreciation," said Matthew Dibb, chief operating officer and co-founder of Stack Funds. …

Several observers consider Ethereum's impending transition equivalent to three Bitcoin halvings – a programmed code that halves the per block bitcoin (BTC) currency supply every four years – that will lead to a 90% reduction in ether's annual issuance. Simply put, the transition is likely to bring a store of value or deflationary appeal to ether. The upgrade has been long pending.

If the merge really does go ahead as planned, this will be a sea change for crypto.

Yes, there are already plenty of Proof of Stake (PoS) cryptos out there, but none of them have Ethereum’s network effect, decentralisation or household-name status.

With market conditions like they are, people have been fleeing riskier crypto projects into the relative safety of Bitcoin and Ethereum.

And if Ethereum can also soon offer holders 9%-12% rewards… without the risk of Celsius, BlockFi, Crypto.com et al… there could be a massive inflow of money into it.

At that point I wouldn’t be surprised if talk of the flippening re-emerges. And if Ethereum really did manage to flip Bitcoin and take the #1 spot, then all bets are off.

As you can see, it’s easy to get carried away with all of this… which is why Ethereum is rallying so hard right now.

It’s going to be an interesting couple of months in crypto, that’s for sure.

What else has been happening?

• The first “regulated” GBP stablecoin launches

I read the whitepaper and I’d be wary of using it. It has a big section on “ongoing assessment and freezing procedure”. Basically, you have to be fully doxed to use it and if they think you or your wallet is suspicions, they will freeze any of their stablecoin you hold.

From the whitepaper:

The use of GBPT on the blockchain is tracked. All ERC-20 wallets receiving GBPT are checked using blockchain analytics software. Where the risk is higher than a given threshold, the business will investigate and take relevant action. …

The business will have the ability to freeze GBPT. This will likely only occur where the business knows a transaction is unlawful or receives a lawful request from a law enforcement agency to freeze GBPT.

GBPT (and pegged GBP) will remain frozen until the wallet holder contacts the business to enquire about their GBPT being frozen. At that time, the person will be queried regarding the risk score allocated against their wallet (unless tipping off may occur) and full due diligence requested from them to satisfy us that the transaction is not suspicious.

• Tether is also launching a GBP stablecoin

What’s interesting here is that Tether’s GBP stablecoin will reportedly be called GBPT. Makes sense as Tether’s USD coin is USDT.

But GBPT is the exact same ticker “pound token” above is going with too. And according to pound token’s whitepaper, it’s also trying to trademark the ticker.

I wonder who will win?

Sticking with the UK stablecoins theme:

• UK Treasury unveils plan to regulate stablecoins in Financial Services and Markets bill

But given no one knows who will actually be running the country in two months’ time, or who’ll be in their cabinet, or what their policies will be, or what their view of crypto will be… it’s hard to know if the above bill will even end up being relevant.

• UK court allows lawsuit to be delivered by NFT

See, NFTs aren’t just about subtle Nazism and bad art. They have real uses, too.

• Three Arrows Capital founders, who owe $2.8 billion, are in hiding (but still giving interviews to Bloomberg)
• Tesla sells 75% of its bitcoin (buy high, sell low, right?)
• SEC says nine cryptos are securities (CFTC says SEC is “regulating by enforcement”)

Okay, that’s all for this week.

Thanks for reading.

Harry

Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.

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