Why Ethereum Is Dropping After the Merge
Last week was a celebratory one for Ethereum: the world’s second-largest blockchain successfully transitioned to Proof of Stake after a painstaking eight-year development process. (Read more here about the merge’s importance.) But on Monday, investors woke up to the token’s price at its lowest point since July. While Ethereum had climbed back to over $1700 in September, it’s now around $1330, amounting to more than a 20% drop.
If the merge was supposed to fix many of Ethereum’s problems, why is its value still tanking? Below are some reasons that the market is in such a slump.
This merger was not intended to create a quick-term effect, but a lasting one.
When Ethereum merged successfully, many of the responding headlines bordered on ecstatic: “Ethereum ‘merge’ will change crypto forever,” crowed Fortune. (This publication—and writer—were admittedly not immune to excitement.)
But while the developers of the merge promised many changes—including a sharp decrease in energy consumption and increased security—a short-term price increase was not one of them. The merge didn’t fix Ethereum’s high fees or congestion. The merger merely created the infrastructure necessary to address the problems of Ethereum in years ahead. Anyone hoping that Ethereum will look and run differently Thursday night would be disappointed.
Major market forces have a significant impact on cryptocurrencies.
Crypto was originally designed to have its own value, but the two markets are closely linked. Since then, Ether tokens such as Bitcoin and Ether have fluctuated in relation to bigger market trends. Since the Federal Reserve’s announcement of its intent to increase interest rates aggressively to fight inflation, Ether prices fell this year. Consumers are dissuaded from investing in crypto and other risky assets because they fear high interest rates.
Continue reading: Bitcoin Crash – Why Bitcoin Continues to Crash
And last Tuesday—two days before the merge—a Consumer Price Index report showed that inflation in the U.S. remains stubbornly high. More inflation means higher interest rates: Federal Reserve Chairman Jerome Powell responded by saying that the central bank must act “forthrightly, strongly” to fight inflation. And the market responded in turn: the Dow Jones Industrial Average fell more than 1,200 points, making it the index’s worst day since June 2020. Naturallly, Ether also fell in the downturn. The Federal Reserve’s decision about a potential hike is expected to be released this Wednesday.
Regulators are a concern for investors.
Does Ether count as a security? The question has been debated since the very beginning of Ethereum, with the blockchain’s developers hoping to avoid passing the Howey Test (the set of criteria that determines whether something is a security) and thus saving Ethereum from much stricter regulatory oversight. Ethereum leaders argue that the token has enough decentralization, but regulators tend to ignore them.
Gary Gensler (SEC Chair) said on Thursday that Proof of Stake tokens might help the Token pass the Howey Test. “From the coin’s perspective…that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others,” Mr. Gensler told reporters after a congressional hearing, according to the Wall Street Journal. Given that Ethereum just switched to Proof of Stake, many investors on social media expressed concern that Ethereum might be Gensler’s next target.
Some crypto-focused lawyers, however, say that there’s a long road from Gensler’s comments to Ether being classified as a security.“The arguments about a token turning into security are actually not that strong,” says Collins Belton, a prominent crypto lawyer and managing partner of legal firm Brookwood. “The primary differences between Proof of Stake and Proof of Work are the software you use and the hardware required.” Collins believes that even if the SEC was able successfully label Ether a security, their logic would mean they’d have to do the same for Proof of Work coins like Bitcoin, too.
Day traders and long-term investors can be at odds.
This week, internal dynamics in the Ethereum community played a significant role. Many Ethereum supporters bought in to the token because they believed that it would lead to long-term success. Ethereum developers and boosters love throwing around the term “ultrasound money,” which describes the belief that the token’s value will be able to withstand global war, economic collapse, or other major disasters.
This activity brought up Ether’s price—which in turn, prompted day-traders who bought into the coin purely for economic reasons to cash out on the value bump. They then caused the price to drop again. The price fell again, a clear sign of long-standing tensions in cryptocurrency. Investors who are convinced in crypto’s long-term transformative capabilities are sometimes at odds with investors looking for quick profits.
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