Research Round-Up: September

How The Merge will impact staking rewards and ether issuance.

by Fidelity Digital Assets

The Research Round-Up On-Demand

Fidelity Digital Assets’ Research Director Chris Kuiper and Research Analyst Jack Neureuter provide additional commentary and market insights in this short on-demand video.

Market Commentary

Area chart showing bitcoin and ethereum 1-year returns as of September 8, 2022.

Source: Coin Metrics 09/08/2022

The price of bitcoin decreased approximately 14% for the month of August, erasing much of the 21% gain made in the month of July. Bitcoin continued to weaken at the start of September, breaking below $19,000 before bouncing back above $21,000 as of September 9. Ether also saw a pullback in the month of August of 9%, but this was after a 62% rebound in the month of July as anticipation of Ethereum’s anticipated network upgrade dubbed “The Merge” started gaining momentum. It appears The Merge anticipation is continuing to help buoy ether as it held up better than bitcoin in the early September sell-off. In this month’s Data to Watch and Insights and Education section we take a closer look at macroeconomic data and digital asset fundamentals.  

News and Editorial 

A curated list of the most relevant news and developments along with our two Sats.

The Merge is Upon Us!

The biggest protocol change to the world’s second-largest digital asset is set to take place sometime starting on September 14, 2022. This upgrade is certainly one of the most anticipated events in the industry and one that some have likened to the process of changing out an airplane’s engine while mid-flight. The purpose of The Merge is to finalize the transition of the Ethereum network’s consensus mechanism from proof-of-work to proof-of-stake, paving the way for even more planned upgrades in the future.

Our Two Sats:  If successful, we expect The Merge to bring about a host of emerging narratives for the Ethereum ecosystem. We broke down The Merge in its entirety along with what it is and isn’t, and the benefits and potential risks in our recently released research piece here. Furthermore, in this month’s edition of “Insights & Education,” we’ll provide additional context about Ethereum staking.  

Bitcoin Mining to Use Less Than 0.5% Of Global Energy if BTC Hits $2 Million

According to new estimates by Arcane Research, Bitcoin’s global energy consumption would rise to 0.36% of global energy if its asset price surged to $2 million by 2040.1  Using factors such as transaction fees, electricity prices, and the asset price of bitcoin, they estimate that energy usage could be 10 times higher than what it is today. Today’s global share usage is estimated to be around 0.05%. Bitcoin’s energy consumption is tightly linked to its adoption as a monetary system, without adoption there is no price, and therefore no incentive for miners to expend energy to mine. The author, Jaran Mellerud sarcastically puts Bitcoin adversaries at ease with this statement: “I have good news for those of you who want to see Bitcoin’s energy consumption decline: You can relax in your armchair, because your wishes will be fulfilled if Bitcoin fails as a monetary system. And you believe Bitcoin will fail, don’t you?”

Our Two Sats:  Bitcoin’s potential environmental impact has been a “high energy” discussion for quite some time now. The discussion usually concludes if you don’t believe in Bitcoin’s many use cases, then of course any energy expenditure is too much. Therefore, the question comes down to a higher philosophical one of who gets to determine if something is worthy of energy use. There are many examples one could use: Christmas lights in the United States, drying machines, air conditioning, or reality TV shows, where one party finds the energy consumption worth it, and another doesn’t. We believe that free market components should dictate where capital is consumed and what is “worth” the energy. In other words, if you pay the price of a good, it is agreed then that the good is worth it. In terms of global energy consumption eventually closing in on a half a percent, that number seemed shockingly low for a global monetary system with 99.99% uptime history. As mentioned in a previous Round-Up, much of that energy consumption could be from renewables as well.

Former Goldman Sachs Banker Explains Why Wall Street Gets Bitcoin Wrong

John Haar, a former asset manager at Goldman Sachs, became interested in Bitcoin in 2017 during the bull market hype. He has since joined Swan Bitcoin, a Bitcoin-only service that enables users to buy bitcoin and aims to help people learn as well.3 Haar explains that people in “legacy finance” fail to understand some of Bitcoin’s primary principles,4 but also the fundamentals of sound money. He notes: “After many conversations, I can say that if there are people in legacy finance who have a well-researched stance on why Bitcoin is not a good form of money or why Bitcoin will not succeed, I was not able to find them.” Haar also notes that being highly specialized in their field may also have the tendency to give them tunnel vision of their own world.

Our Two Sats:  Bitcoin is inherently hard to understand because it is a multifaceted technology that is comprised of a multitude of disciplines, all with their own intricate components. As Haar explains in his piece, some knowledge is needed in economics, monetary theory, investor psychology, computer science, cryptography, energy, geopolitics, politics, game theory, history, privacy, and human rights. Anyone that has dedicated time to understanding Bitcoin might relate to the experience of suddenly realizing an hour or more has passed and you haven’t finished your original reading but now have numerous tabs open on your computer. This is what is often referred to as “falling down the rabbit hole.” Each one of these components of Bitcoin are intertwined with the others. One of Fidelity Digital Assets' goals is to provide research that can help in this long learning process, breaking down concepts and providing analysis to many of these different areas. However, even with the benefit of a trusted research provider, there are no shortcuts to putting in the personal time and energy to understanding all these various concepts.  

Hodlnaut Placed Under Creditor Protection After Freezing Withdrawals

Crypto lending firm Hodlnaut has been placed under a form of creditor protection, called interim judicial management, by the Singapore court.6  The Singapore-based firm froze all withdrawals and services on its platform on August 8, citing a liquidity crisis and turbulent market conditions, and turned to judicial management as a means of avoiding forced liquidations. Under the ruling, Hodlnaut is allowed to financially rehabilitate itself, under the condition that a judicial manager takes control over the company for the time being. Before applying for the court ruled judicial management, Hodlnaut had cut 80% of its workforce in hopes to restore a 1:1 asset-to-debt ratio which would allow users the ability to withdraw their initial deposits. Previously denying any direct exposure to the Terra ecosystem, leaked documents from the interim judicial management proceedings reveal that Hodlnaut had staked TerraUSD Classic (USTC) through the Anchor Protocol, causing losses of $189.7 million.7 While they previously had announced exploring options to allow users to withdraw initial deposits with accrued interest in full before closing their accounts, this decision is now subject to the approval of the appointed judicial managers.

Our Two Sats:  While Hodlnaut has remained steadfast in its fight against complete liquidation, this development shows that the second order effects of the Terra collapse are still pertinent and underpins the importance of responsible lending and collateralization practices. Despite the hefty losses for investors, the exposure of unsound business practices will hopefully serve as a warning for firms going forward to enact more stable controls and procedures to protect users from atypical market activity. While it is encouraging to see action being taken to resort to measures that might improve liquidity and make their users whole, Hodlnaut serves as yet another stark warning of the dangers of overexposure and under collateralization in this nascent and developing industry.  

OpenSea Says Marketplace Won’t Support Forked NFTs Post-Merge

“As the date for the Ethereum Merge approaches, non-fungible token (NFT) marketplace OpenSea has announced that it will focus on supporting only the NFTs that are on the upgraded proof-of-stake (PoS) blockchain.” OpenSea has also stated their team is preparing the trading platform for any unforeseen issues that arise after The Merge. While some other platforms such as Chainlink have also signaled their support for The Merge by only supporting the proof-of-stake chain, Coinbase has said it will evaluate any potential forks following The Merge. At the time of writing, an Ethereum proof-of-work token backed by Ethereum’s current miners is now trading at approximately $37 after launching August 8 and quickly rising to roughly $140.10 

Our Two Sats:  The Merge, where Ethereum transitions its consensus algorithm from proof-of-work to proof-of-stake, promises to be the biggest change to a layer-1 protocol the digital assets realm has ever seen. An interesting view to consider is how this plays out for “decentralization.” As we noted in our recent report, one of the potential risks of The Merge and moving to proof-of-stake is increasing centralization, where we could see large central authorities make decisions for the users. It is therefore not surprising to see the launch of a proof-of-work token, but whether or not it will survive post-Merge is the question, and one that could be influenced by different services and applications choosing to support only the proof-of-stake chain.

Bank of Russia Agrees to Legalize Crypto for Cross-Border Payments

The central bank of Russia has begun to soften its stance towards the legality of cryptocurrency usage. Alexei Moiseev, deputy finance minister, broke the news that the Bank of Russia and the finance ministry expect to legalize cryptocurrency for cross-border payments soon.11 While clarifying that the country is still opposed to legalizing cryptocurrency payments within the country, Moiseev pointed towards the importance of enabling local crypto services in Russia as many Russians currently rely on foreign platforms to open a crypto wallet saying, “It is necessary to do this in Russia, involving entities supervised by the central bank, which are obliged to comply with Anti-Money Laundering and Know Your Customer requirements.” This contrasts with the 2020 Russian law dubbed “On Digital Financial Assets,” which prohibited the use of cryptocurrencies for payment purposes. While the Bank of Russia has historically turned a cold shoulder towards cryptocurrency payments on account of protecting the Russian ruble as the only legal tender in the country, geopolitical changes have forced reconsiderations to make exceptions for cross border payments while keeping cryptocurrency payments out of Russia’s domestic financial system.

Our Two Sats:  This development from Russia exemplifies one functional use case of cryptocurrency, but also serves as a reminder that it operates in a non-discriminatory nature where anyone can be a participant of the protocol so long as they are abiding by the pre-determined rules. As a neutral technology like fire or the internet, it can be used by both allies or enemies of any person or country. The same Bitcoin technology that allows citizens to escape areas of conflict or political oppression with their life savings, or access previously unavailable financial services, can also help nation states evade sanctions. 

News Quick Hits

  •  Wladimir van der Laan, a major developer and maintainer of Bitcoin, has announced his retirement. He was Satoshi Nakamoto's second successor and one of the few individuals in the world with full commit access to the Bitcoin Core GitHub.12 
  • After nine years in the Ethereum community, Stephan Tual, one of the main architects of The DAO's structure, has left, citing a misalignment between the project's original objectives and what, in his opinion, it has evolved into. In an email to the community he writes, "I cannot, in good conscience, continue to act like 'everything is well' in web3."13 
  • Bitcoin-friendly country El Salvador has seen tourism numbers up 82.8% this year, despite the bitcoin bear market.14
  • Texas Comptroller’s office believes Bitcoin miners can benefit the Texas energy industry.15 
  • Ethereum co-founder Vitalik Buterin thinks the potential of cryptocurrency payments is “underrated” compared to fiat, and highlights the convenience of international payments and charitable donations as examples.16 
  • One bitcoin proponent recommends the solution to U.S. student loan problems could include locking up $10,000 of bitcoin in a smart contract for 10 years that pays the debt once released.17 
  • Bitcoin Depot, one of the largest crypto ATM providers in North America, plans to list its stock on Nasdaq in the first quarter of 2023 through $885M SPAC deal.18 
  • SEC delays VanEck’s third Bitcoin spot ETF application by 45 days.19 

Data to Watch

Data we are currently keeping an eye on and our commentary.

Last month, we observed bitcoin making a potential base in terms of price movement and even showing some signs of rallying with a 20% gain in the month of July. Therefore, in our previous month’s report, we asked whether this was a sign of life or a new bull market or perhaps more of a “bear market rally,” noting that the recent price increase was not particularly well supported by on-chain fundamentals yet. Indeed, it appears the support was not there to push bitcoin past its 200-week moving average, which we observed was acting as a resistance level. In fact, this episode is the longest bitcoin has remained below its 200-week moving average. 

Multi-line chart showing the price of bitcoin and 200-week moving average from July 2018 to June 2022.

Source: Coin Metrics 09/08/2022

The plunge below $19,000 in early September for bitcoin put it in a drawdown of approximately 70% from its all-time highs, but zooming out puts this in perspective that we have been here before:  

Dual axis chart showing the price of bitcoin and drawdown from all-time high from July 18, 2010 to September 8, 2022.

Source: Coin Metrics 09/08/2022

The question with such a large drawdown is usually two-fold: is the dramatic decline indicative of a change in the investment thesis (fundamentals) and if not, what is driving the sell-off and what will need to change?

First, bitcoin’s fundamental data has not meaningfully changed, and in fact has improved marginally from last month as hash rate remains high, addresses with non-zero balances continue to grow, and even active address activity is turning up. Interestingly, bitcoin that have not moved in over one year (termed “illiquid”) continues to grow compared to bitcoin that have moved within the past year (“liquid”), suggesting higher determination of “hodlers” even in the face of higher volatility.

Area chart showing bitcoin movement in the last year as of September 8, 2022.

Source: Coin Metrics 09/08/2022

Secondly, the macroeconomic picture remains in the driver’s seat of bitcoin and arguably all major asset classes. However, what is somewhat unique right now is how both equities and bonds continue to be under pressure and are selling-off together with higher volatility across the board. The U.S. dollar is rocketing to new highs, and as such, the relative weakness of bitcoin in U.S. dollar terms is not as surprising. The recent move down in bitcoin comes as reports of another 0.75% interest rate hike by the Federal Reserve may be coming in September.20 Therefore, the continued tightening monetary environment will have to change for the near-to-intermediate term picture of bitcoin to improve, in our opinion.

Dual axis line chart showing the US dollar vs the price of bitcoin from September 2019 to September 7, 2022.

Source: Bloomberg 09/07/2022

Turning to the Ethereum network, while ether (ETH) also remains in a deep drawdown and bear market, in relative terms compared to bitcoin it continues to show strength ahead of The Merge. We note the ratio of bitcoin to ether in terms of market cap continues to bump up against recent highs. Will The Merge be the final catalyst to push it higher or will it be a case of “buy the rumor, sell the news” with a successful merge already priced in?

Line chart showing the ratio of bitcoin to ether in terms of market cap from July 2015 to July 20, 2022.

Source: Coin Metrics 09/08/2022

Insights and Education 

A monthly long-form section where we provide a Fidelity Digital Asset’s perspective or educational piece. 
The largest news related item taking place in the digital asset space in September is The Ethereum Merge. For a comprehensive overview of The Merge, check out our recently released piece here. However, in this month’s edition of “Insights & Education,” we go into further detail on what The Merge means for investors looking to potentially take advantage of ether’s ability to be a yield generating token through staking, and why the liquidity around staked ether is not as simple as it may first appear.

How will The Merge impact staking rewards and ether issuance?

Prior to The Merge, those who have chosen to stake their ether on the Beacon Chain receive only block rewards for doing so. These block rewards, which are simply token inflation, are roughly equal to about 1,600 ether per day. However, block rewards of an additional roughly 13,000 ether per day are given to miners as an incentive to secure the proof-of-work chain today. After The Merge, the 13,000 ether mining incentive will no longer be issued, leaving just the 1,600 new ether issued per day to stakers. When combining this reduction of newly issued ether with the EIP-1559 upgrade (implemented a base fee which is burned, meaning it is removed from circulating supply), it is very possible that the net issuance of ether is negative on a regular occurrence. Additionally, tips – a portion of transaction fees paid to miners – will be paid to validators who stake on the Beacon Chain after The Merge is completed. Therefore, both newly issued ether and tips will combine to make up the payments to validators after The Merge. Additional revenue sources such as maximal extractable value (MEV), which is derived through the inclusion, exclusion or reordering of transactions, allows for validators to earn further rewards from staking their assets as well. 

Image showing impact of rewards and issuance of ether after The Merge.

When will staked ether be able to be withdrawn?

Following The Merge in September 2022, staking on the Ethereum network will continue to represent an illiquid activity until separate network changes, called the Shanghai and Capella upgrades, take place at a later, to be determined date. These upgrades will allow ether that is staked with Beacon Chain validators and rewards earned to be withdrawn. Until these events take place, those who choose to stake do so while accepting illiquidity of their position for an undetermined length of time. The upgrades aren’t expected to take place until at least 6-12 months after the date of The Merge. Additionally, it may take several weeks or months after the upgrades for individuals to be able to access their assets due to a limit on how many validators can exit the network in a given timeframe. There is likely to be a large queue of validators waiting to exit once they are finally able to do so.

Timeline for Ethereum Merge, Shanghai, and Capella upgrades.

The Shanghai and Capella upgrades are expected to be the highest priority for the Ethereum development community once The Merge is completed. However, the upgrades are still in the active design stages with multiple implementation options being vetted.

Risks of Staking Prior to Post-Merge Upgrades

Staking is not a risk-free activity. In the event validators operate outside of the protocol-determined requirements, they are penalized, or slashed, which results in the systematic burning of staked ether. During this period of illiquidity prior to Shanghai and Capella upgrades, staking operators have limited options to manage risk. If operators anticipate validators may be penalized, they may proactively exit validators (i.e., remove them from the active validator set selectable for block proposals or attestations) to limit downside risk; however, in this event, ether staked in these validators does not earn rewards and is locked until these upgrades are released.


Christopher Kuiper, CFA, Director of Research, Fidelity Digital Assets

Jack Neureuter, Research Analyst, Fidelity Digital Assets

Matthew Hogan, Research Analyst, Fidelity Digital Assets

Daniel Gray, Research Analyst, Fidelity Digital Assets


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