In his latest blog post, former BitMEX CEO Arthur Hayes broke down how he expects Ethereum traders to react before and after the merge.

Based on the technicals of the upgrade, he suspects that Ethereum will rally after a successful transition in September, similarly to how Bitcoin rallies during its periodic halving cycles. 

The Theory of Reflexivity

In an article titled “ETH-flexive,” Hayes centers his bullish thesis around George Soros’s “theory of reflexivity.” The theory posits that there is a feedback loop between market prices, and the expectations held by market participants for a given market situation.

In the context of the merge, Hayes believes this phenomenon can rally Ethereum’s price due to the reflexive relationship between its price, and its deflationary properties. 

“If the merge is successful… traders will buy ETH today, knowing that the higher the price goes, the more the network will be used and the more deflationary it will become, driving the price higher, causing the network to be used more, and so on and so forth,” he explained.  “This is a virtuous circle for bulls.”

The merge will usher in two major changes for Ethereum: it will shift its consensus mechanism from proof of work to proof of stake, and also reduce ETH’s supply issuance rate by roughly 90%. This has led some to nickname the event the “triple halving.”

Combined with EIP-1559 – which burns ETH out of circulation with every transaction – ETH is expected by many to become a net-deflationary currency following the upgrade. Therefore, Hayes suspects that a feedback loop can form between ETH’s price appreciation, usage, and deflationary issuance.  

Alternatively, the co-founder noted that this feedback loop could work against ETH, driving its price down in the event of an unsuccessful merge. However, a look at ETH’s spot market activity, which has greatly outperformed Bitcoin in recent weeks, suggests that market participants expect a successful merge event. 

Not Selling the News

Ethereum derivatives data from Glassnode last week suggested that traders may be planning to “sell the news” once the merge actually takes place in mid-September. 

Specifically, the term structure for Ethereum futures is trading in backwardation leading all the way until June 2023. That means futures traders expect ETH’s price will drop by the maturity date of their contracts.

However, Hayes offered two alternative theories for why ETH may be experiencing buy pressure in the spot market, and sell pressure in the futures market.

On one hand, traders could be hedging their long physical ETH bets in the futures markets in the case of an unsuccessful merge. On the other, they could be hedging against their ETH position for general reasons, while accumulating spot ETH simply to pick up free chain-split tokens following a speculative POW fork.

Hayes expects that these traders will “buy back their hedge” following a successful merge and that any people attempting to sell their spot ETH will be in the minority. If there is indeed a selloff at that time, Hayes only plans to increase, rather than decrease, his position. 

“I expect we will see it play out similar to Bitcoin halvings,” he wrote. “We all know the dates they will occur, and yet, Bitcoin still always rallies post-halving.”