Why CNBC analyst Brian Kelly warns the upcoming Ethereum merger will have many hidden risks that traders don't realize
The CEO of digital currency investment firm BKCM is weighing the prospects of Ethereum (ETH) weeks before the project kicks off the merge
In a new episode of Fast Money, CNBC contributor Brian Kelly first mentions how Ethereum investors might not be earning as big a payday as expected for profitable trades due to ETH's inflation mechanism.
"I think it's probably more 'sell the news,' which is maybe not that intuitive because in crypto you generally want to buy the news. But everybody's been buying Ethereum because they're going to get into this merger and now they're going to get a supposed return.
Just so you know, it's not really a return. You're just getting your inflation rewards back, so you're offsetting the inflation in currency. It's not really a return."
Kelly expects investor enthusiasm ahead of ETH's mid-September switch from a proof-of-work (PoW) to proof-of-stake (PoS) consensus mechanism will inevitably lead to a sell-off, but warns there will be there is also the possibility of confusion or outright failure that could negatively affect the price of Ethereum, as well as the project itself.
“There is probably more potential for a news sell event as the merger kicks off.
You could also have a technical problem. Not only [that], but there are a lot of questions about what apps will do if Ethereum splits again.
You could have a chain fork and now not one, but two or three different Ethereums. So what does your DApp (decentralized application) go on and play on?
I think there is more risk in the Ethereum merger than people realize.”
Looking at the economy more broadly, the analyst discusses the correlation of cryptocurrencies with the tech stock sector and highlights the fundamental differences between Bitcoin (BTC) and Ethereum.
"It has been very high. The correlation of Bitcoin with the Nasdaq is around 60%. The correlation of Ethereum with the Nasdaq is around 70% for the last few years. 30 days in a row Crypto is effectively acting like a triple Q ETF [exchange traded fund] with 2x leverage.
I think there is some nuance here as Bitcoin itself is not a tech stock. It is definitely an alternative currency. It's digital gold. You need it when your country destroys its currency, as many governments are doing today.
Ethereum, on the other hand, can be thought of as a bit of a tech stock because it's going to disrupt a lot of what tech stocks are doing today.
To the extent that it drives away active daily users from places like Twitter, Facebook, and Google, I think there is something to be said for Ethereum being a tech stock.”
At the time of writing, ETH It is priced at $1,578 and BTC is trading at $19,983.
Sep 03, 2022
