Bitcoin, the Merge, and the Flippening

The cryptocurrency space has lost hype after the parabolic rise in the price of crypto-assets in 2021. In this piece, we ask whether the long crypto winter is over, flag what to look out for when the Ethereum ‘Merge’ occurs and whether this will drive the so-called ‘Flippening’, and take a gander at the technicals for Bitcoin and Ethereum.

Is the crypto winter over?

A recent bounce in Bitcoin has many asking whether the crypto-winter of 2022 could be about to come to an end. Bitcoin saw a peak-to-trough drawdown of more than 74%, after having topped out at nearly $US70,000 in November of last year. The crypto price is up more than 40% from its lows below $US18,000. But prices remain heavily driven by market sentiment. Bitcoin has traded in a tight correlation with the NASDAQ, trading on changing expectations of US Fed policy as the central bank attempts to control inflation.

The Ethereum ‘Merge’ is coming

The Ethereum Merge is designed to shift the cryptocurrency’s blockchain network from proof-of-work to proof-of-stake. Proof of work is a type of network that relies on the acquisition of greater computational power to compete for rewards, while proof of stake randomly selects validators (someone who offers their computer to maintain the network) based on the total amount and time their Ethereum has been ‘staked’ (locked-up on the network in order to ensure its security and process transactions).

The new model will see validators receive interest on their staked coins, with the change in a process designed to make the entire system faster and more energy efficient. The merge is one of several upgrades that will happen to the system over time.

Is the ‘Flippening’ upon us?

The ‘Flippening’ is a portmanteau of the words flip and happening, and in the crypto community marks the event where the value of Ethereum overtakes that of Bitcoin. There is speculation that the ‘Merge’, and its expected impact on the price of Ethereum, could be the catalyst of this event. At the time of writing, the market value of Bitcoin is around $US444 billion, while Ethereum is less than half of that at just over $US200 billion. While conceivably the flippening could occur by virtue of Ethereum’s upgrades, the closing of the value gap will take time.

Bitcoin and Ethereum have a statistically significant correlation of nearly 0.95, which tends to increase during periods of ‘risk-off’. That means not only does Ethereum need to nearly double in value for the Flippening to occur, but it must also see its high correlation to Bitcoin break-down, which is unlikely in this environment given the riskiness and tight correlations across the asset class.

A look at the charts

• Bitcoin

The price of Bitcoin has ground higher as risk-appetite returns to financial markets. The asset remains in a bear market and a clear downtrend, with prices below the long-term moving averages and momentum flatlines. In the shorter term, Bitcoin is oscillating in a trend channel, with key resistance just above $US25,000. The major level of support in the longer term is the previous bull cycle higher of approximately $US19,000.

• Ethereum

The technicals look more favourable for Ether, which has seen price push through and holds above the 100-day moving average. The crypto remains in a primary downtrend, as price meets resistance around $US1700. The upcoming Merge has boosted sentiment towards Ether, but given its riskiness and relative volatility, the crypto will probably be heavily influenced by monetary policy and risk appetite for now.

Summary

The long crypto-winter could be over. But the performance of crypto-assets, especially Bitcoin, remains highly correlated with other risk assets like equities and therefore depends heavily on the inflation outlook and central bank tightening. Ethereum’s Merge will be a massive event to watch in the coming months. But any overtaking of Bitcoin by Ethereum will take longer than a few months to happen, if at all.