I've been immersed in George Soros' The Alchemy of Finance, a book that inspired this stream-of-consciousness exploration of Ethereum's upcoming Merge through Soros' macroeconomic lens. When it comes to macroeconomic investing, Soros reigns supreme—his disciples like Paul Tudor Jones and Stan Druckenmiller built their success upon his foundational strategies. The Alchemy of Finance offers a philosophical deep-dive into market drivers, essential reading for anyone serious about capital management.
Soros’ Reflexivity Theory Explained
At its core, reflexivity theory posits a feedback loop between market participants and prices: perceptions shape reality, which in turn reshapes perceptions. Participants unconsciously enact the futures they predict—their biases amplify price trends, creating self-fulfilling prophecies.
Applying Reflexivity to Ethereum’s Merge
The Merge’s outcome hinges on developer execution, independent of ETH’s price. Yet, post-Merge dynamics are deeply reflexive. Here’s why:
Structural Changes Post-Merge
- Block Rewards: Daily ETH issuance drops from ~13,000 ETH (to miners) to ~1,000–2,000 ETH (to validators).
- Fee Burning: Base fees are permanently burned—a variable tied to network usage.
Net ETH Supply = Block Rewards − Burned Fees
Burned fees depend on network activity, which is intrinsically linked to ETH’s price through reflexivity:
- Mindshare: ETH’s price and Ethereum’s search trends correlate at r=0.77. Price surges attract users, fueling further adoption.
- Developer Activity: More users → more developers → better dApps → more users. A virtuous cycle.
Thus, deflationary pressure scales reflexively with ETH’s price: higher prices → more usage → more fees burned → greater deflation → higher prices.
Two Post-Merge Scenarios
- Success: A positive feedback loop. Traders buy ETH pre-Merge anticipating this cycle. The ceiling? Global Ethereum adoption.
- Failure: Negative reflexivity (or positive inflation feedback). ETH likely bottoms at $800–$1,000 (post-Terra/LUNA crash levels).
Market Sentiment Today
- Spot Market: ETH outperformed BTC by 50% since mid-2022, signaling bullish Merge expectations.
- Derivatives: Futures trade in backwardation (discount to spot), indicating heavy hedging. Market makers short ETH现货 to hedge long futures, masking underlying bullishness.
Post-Merge Derivatives Impact
If the Merge succeeds:
- Hedgers buy back shorts → ETH rallies.
- Fork tokens (from Proof-of-Work ETH) sold → ETH unwinds hedges, exposing reflexive upside.
Trading Strategies
For Merge Believers:
- Spot ETH: Direct exposure to reflexive upside.
- Lido Finance (LDO): Higher beta to Merge success (up 6x since June).
- Long ETH Futures: Earn negative basis (e.g., Dec-2023 contracts).
- Long ETH Calls: Dec-2022 strikes benefit from lower implied volatility vs. actual volatility.
Advanced:
- Curve Steepener: Long Dec-2023 futures + short Sep-2022 futures to capitalize on post-Merge backwardation shifts.
Selling Timing:
- Avoid premature exits; structural deflation post-Merge could mirror Bitcoin halving rallies.
- Consider adding on sell-offs—today’s market under-prices best-case scenarios.
Hedging a Failed Merge
Short Setup:
- Timing: Just before expected Merge (maximizing expectation vs. reality gap).
- Instrument: Mar-2023 puts (cheapest downside exposure).
FAQs
Q: How does ETH’s post-Merge supply differ from Bitcoin’s halving?
A: Bitcoin’s halving cuts issuance predictably. ETH’s net supply depends on usage-driven fee burns, creating reflexive volatility.
Q: Why is the futures curve in backwardation?
A: Sellers hedge Merge uncertainty or position for fork tokens. Market makers short现货 to balance, suppressing spot prices temporarily.
Q: What’s the biggest risk to a post-Merge rally?
A: If deflation fails to meet expectations (low usage → minimal fee burns), reflexive selling could reverse gains.
👉 Explore ETH trading strategies for Merge-centric portfolios.
Key Takeaways:
- The Merge’s success would unlock a reflexive cycle of price → usage → deflation → price.
- Market expectations are bullish but obscured by hedging flows.
- Post-Merge, watch for unwinding shorts and fork token dynamics.
Final Note: Writing this clarified my conviction—buy the dip.