2021-08-04 09:02:15

How to Profit From Price Volatility

  • Ethereum’s London hard fork on August 5 aims to improve network efficiency and fee predictability.
  • Crypto experts explain how this upgrade could impact the price of ether in the short- and long-term.
  • They also share how traders could capitalize on the volatility if ether makes a sudden price move. 

Ethereum is getting a hotly anticipated upgrade that will destroy ether tokens and — some say — lift the price of the second-largest cryptocurrency. 

Named the London hard fork, the software upgrade, which is scheduled to take place on Thursday, contains five Ethereum Improvement Proposals or code changes. The most controversial and arguably most impactful of the five is EIP-1559.

To interact with the ethereum network, users need to pay a fee, which is commonly referred to as a gas rate. Normally, ethereum users and miners can negotiate a good gas rate for which to execute their transactions. This is done via something called a “first-price auction,” which has resulted in some users overpaying and others experiencing fee unpredictability.

But EIP-1559 will mandate a minimum cost or base fee that all users will have to pay in order to execute their transactions. Those fees will be burned from the network instead of being rewarded to miners, according to Christine Kim, a research analyst for CoinDesk

“EIP-1559 seeks to improve the efficiency of the ethereum market by introducing these minimum gas rates that are algorithmically dictated by the ethereum protocol rather than up for users and up for miners to bet against,” Kim said in an interview. 

The upgrade is also introducing a capability that will make block sizes on ethereum more variable. “Currently the gas limit, which constricts the size of the block or how much data can be written onto a block, is 15 million gas,” Kim said. “But basically, under EIP-1559, block sizes can be double that amount, it can increase up to 30 million gas.”

Kosala Hemachandra, founder and CEO of MyEtherWallet, compares this new feature to riding a taxi that can expand or reduce its gas tank based on demand. 

“If there are too many people who want to get rides, it can expand to have more gas in the tank,” Hemachandra said in an interview. “And if there are not enough it will reduce, and then the cost of the ride will be based on how busy the network is. Basically, the number of transactions that ethereum can do will double when it’s busy.”

Ethereum has long been plagued by its gas cost and scalability problems. The rise of non-fungible tokens and decentralized finance activities this year has led to congestion problems and surging transaction fees like never before. Average transaction fee levels on the network shot above $60 as recently as mid-May before crashing down to a six-month low of $4.42 as the crypto market cooled, according to data from Coin Metrics.

“The result is it will make it easier to use DeFi, NFTs, and games,” Keld van Schreven, managing director and co-founder at KR1, said in an email interview. “It could also potentially help the ether price as it’s burning 4% of gas fee tokens a year, as this decreases supply in the market. While we still wait for ether staking to go live, the London upgrade is a big moment for the maturing of ethereum.”

Price impact — deflationary or priced-in?

As a result of the coin burns, the upgrade implies a lower supply of ether tokens, which some interpret as a catalyst for the price of ether to increase substantially shortly after. 

“I believe the price of ethereum should surge following the upgrade,” María Paula Fernández, an advisor at Golem Network, said in an email interview. “The improvements London introduces and the restructuring thanks to EIP-1559 are really beneficial to the entire ethereum ecosystem. Gas predictability will allow for more newcomers to use ether, and for developers to work more freely.”

“We expect a supply shock in the not too distant future. If all goes ahead as planned, the price of ethereum will increase due to this change,” George McDonaugh, managing director and co-founder at KR1, said in an email interview.

Others foresee a more long-term process where ether trends higher after the upgrade. “Over the long term, this will be a positive for price support for ethereum because it does decrease the supply of ethereum,” Matthew Gould, CEO and founder of Unstoppable Domains, said in an interview. 

He added: “It’s not something you’re going to see an immediate impact on. I don’t know how investors are going to interpret that. If they are forward-looking investors, and they view this as very positive, maybe there’ll be some price action in the short term because of that.”

There are also those who think the upgrade has already been priced in given investor anticipation for the event. 

“This is ethereum’s 11th hard fork and each upgrade gets a little bit more ambitious as more developers start to think about what’s possible,” CoinDesk’s Kim said. “But historically, I haven’t quite seen the price for ethereum surge after an upgrade is successfully executed, so that’s why I’m hesitant to think that this software upgrade will somehow impact the price of ether.”

There is something different about this particular upgrade though. After the London hard fork, ether miners, whose revenues have surpassed that of bitcoin miners for the past three months, will be paid less. They will lose part of the revenue that comes from transaction fees, which will be burned from the network instead of being rewarded to miners. 

“I’m not exactly sure how the miners will react, how the market will react, how the users will react,” MyEtherWallet’s Hemachandra said. “But one thing is guaranteed for sure: EIP-1559 will be really beneficial for the network because it can support more transactions now and it will be less inflationary.”

Taking advantage of volatility 

While the upgrade will most likely go through smoothly, any appearance of failure or hiccups could stoke volatility, which is no stranger to the crypto markets.

Golem Network’s Fernández said the upgrade has been thoroughly tested on all ethereum testnets, so it is “extremely unlikely, though not to say impossible” that the upgrade fails. 

“I would expect more experienced investors to use this as a buying opportunity,” Grant Whitlock, head of trading at crypto trading firm GlobalBlock, said in an email interview.

Even if the upgrade is successful and the price of ether rallies on the back of its completion, there still could be volatility on the upside. 

“Investors are likely to prepare for higher ether prices by accumulation to take advantage of less supply, which will likely over-emphasize the market dynamics, KR1’s McDonaugh said. “Expect volatility for sure.”

Ether, which notched a 12-day winning streak on Monday, was trading at around $2,492 as of Tuesday afternoon. 

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