Crypto prices may have "found a floor" in recent weeks, JPMorgan said in a note on Monday.
Bitcoin has jumped 36% from its mid-June low, while ether is up 102% over the same time frame.
"We think the real driver has been the Ethereum merge and positive data... indicating the merge is viable in 2022," JPMorgan said.
After bitcoin fell as much as 75% from its peak, crypto markets appear to have "found a floor," JPMorgan said in a note on Monday.
Bitcoin and ether have surged 36% and 102% from their mid-June lows, respectively, and the total market value of cryptocurrencies has reclaimed the all-important $1 trillion level, according to data from CoinMarketCap.
Analysts at JPMorgan said there are two reasons driving the recent strength in the cryptocurrency market.
"What has helped, we think, has been more limited new contagion from the collapse of Terra/Luna," JPMorgan said, referring to the stablecoin implosion that led to tens of billions of dollars in losses and sparked a leverage unwind that wiped out crypto firms like hedge fund Three Arrows Capital and crypto broker Voyager Digital.
"However, we think the real driver has been the Ethereum merge and positive data following the launch of the Sapolia testnet in early July and Ropsten testnet in June, indicating the merge is viable in 2022," JPMorgan said.
The upcoming Ethereum event has been highly anticipated by investors. The merge is designed to transfer the Ethereum blockchain away from a proof-of-work network and instead to a proof-of-stake system, which is supposed to be faster and more efficient from an energy consumption perspective when mining.
A successful Ethereum merge later this year should help boost sentiment in the crypto markets, JPMorgan said. The merge is currently expected to take place in September, depending how the upcoming Georli testnet performs. That test is schedule for August 11 and is one of the last steps before the merge.
While ether sees a strong resurgence, there's still a long way to go before it and the broader crypto market recover recent losses. Trading volumes in crypto continued to fall in July, and daily trading volumes in NFTs have collapsed 84% year-over-year, JPMorgan said.
Ultimately, the ongoing recovery of the cryptocurrency market could hinge on the upcoming Ethereum merge in the short-term as crypto investors look for a much-needed boost in sentiment.
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