The central theses
- Ethereum successfully delivered the merger after years of anticipation, but ETH is down. The number two crypto has lost 25% of its market value over the past week.
- Although the merger brought several notable upgrades, it will likely take some time for the market to digest the event.
- The weak macro environment has been a major factor this year, weighing on ETH and other crypto assets.
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Ethereum made history when it completed Proof-of-Stake “the merge” last week, but ETH has suffered a sharp drop since the update was delivered.
Ethereum hits post-merge sell-offs
Crypto traders are rushing to sell their Ethereum after last week’s much-anticipated “merge” event.
The world’s second-largest blockchain has seen heavy losses since transitioning to a proof-of-stake consensus mechanism early Thursday. ETH was trading just above $1,606 at the time the merger was delivered, but has since fallen about 17.8% to trade at $1,320 at press time.
ETH showed weakness ahead of the event, taking a hit on Wednesday as the US CPI recorded a higher-than-expected inflation rate of 8.3%. It is down 25.1% over the past week, according to CoinGecko data.
Ethereum’s sell-off comes as most major crypto assets suffer from market volatility. September has historically been a weak month for crypto prices, and recent market action has added to the pain for crypto hopefuls after months of sell-offs. Bitcoin fell below $19,000 on Monday and is currently trading at $18,684. Ethereum-related tokens like Ethereum Classic and Lido have also tumbled, losing 12.6% and 9% of their market value, respectively, in the past 24 hours. ETHW, the native token for the Proof-of-Work Ethereum chain launched after the merger, has fallen to $5.49 after surpassing $50 on some exchanges ahead of the event.
While ETH holders had hoped the merger would serve as a catalyst for bullish price action for Ethereum’s native assets, the event appears to have suffered from the sell-the-news effect. “Buy the rumor, sell the news” is a popular phrase in the financial markets. It refers to the practice of buying an asset ahead of an important event in anticipation of a price increase before subsequently selling the asset. Coinbase’s IPO on Nasdaq was another example of a sell the news event; Many market participants were hoping that the US exchange listing would propel Bitcoin to $100,000 after the event, but the top crypto peaked at $64,000 on the day and then lost over 50% of its market value in six weeks.
Changes to Ethereum
Anticipation for the Fusion was high, partly because it had taken years to develop and partly because it was such a major technological feat. The transition from proof-of-work to proof-of-stake, discussed by Ethereum co-founder Vitalik Buterin since the inception of blockchain, has often led to comparisons to an airplane changing its engine mid-flight.
When the merger was complete, Ethereum introduced several major changes. First, and arguably Ethereum’s most significant step so far in preparing for general adoption, the blockchain has reduced its energy consumption by around 99.95% by deploying proof-of-work miners. Several mainstream news outlets including The guard, The Independentand financial timesreported on the merger as it shipped last week and led discussions on blockchain’s improved carbon footprint.
Additionally, with the move to proof-of-stake, Ethereum has cut its ETH issuance by around 90% as it no longer has to pay miners. Corresponding ultrasonic.money data, the circulating ETH supply has increased by about 3,000 ETH since the merger, compared to the 53,000 ETH it would have paid out under proof-of-work. The reduction in emissions has been widely hailed as a bullish catalyst for ETH, with Arthur Hayes naming merge trading as such “not a tough nut” based on the fundamental switch.
ETH holders can generate returns of around 4% by using their assets to secure the network, and with the shift to a more ESG-friendly consensus mechanism, the ability for institutional investors to put capital into ETH has fed the narrative that the merger would help the asset rise.
A delayed reaction
While Ethereum has introduced several improvements, there are several factors that could explain why ETH hasn’t responded in the way its biggest fans had hoped. The reduction in ETH supply is gradual over time. It’s likely that the market will need time to process the impact of such a big change, much like Bitcoin tends to appreciate months after its “halving” events. With the supply cut, ETH could theoretically become a deflationary asset, or “sonic” as it’s called in the Ethereum community, but market participants may wait and see how the change plays out before investing in ETH.
Similarly, while Ethereum has acquired green credentials with the switch, it could take time for hedge funds and other big players to invest in ETH (institutions and traditional financial firms tend to move more slowly than crypto-native investors). The merger is also unlikely to change mainstream perceptions towards crypto and its climate costs. The entire asset class was scrutinized for the environmental impact of proof-of-work mining in 2021, and the climate issue has arguably been a significant obstacle in preventing mass adoption. While Ethereum has lowered its energy consumption, the world’s largest cryptocurrency still uses proof-of-work and likely will continue to do so for many years to come. Even if potential investors are aware that Ethereum uses Proof-of-Stake, they may still have an aversion to crypto due to Bitcoin’s energy consumption. Similar to the slashing of ETH issuance, it could take months or years before reducing energy consumption improves Ethereum’s appeal to both institutional and retail investors.
The macro image
Aside from the Ethereum merge itself, the broader crypto market and its place in the current macroeconomic climate may explain why ETH is bottomed. Like Ethereum, Bitcoin is over 70% down from its November 2021 high, leading to a nearly year-long slump in the crypto market. Cryptocurrencies have traded in close correlation with traditional stocks in 2022, suffering sharp losses at the mercy of the Federal Reserve and its ongoing economic tightening policies. The Fed has been raising interest rates throughout the year in response to rising inflation, and risky assets have suffered. Fed Chair Jerome Powell’s recent hints of more “pain” to come suggest that more rate hikes could be on the way, especially after the latest inflation data came in ahead of estimates last week. The Fed has announced that it intends to bring inflation down to 2%; the US Federal Reserve is expected to announce another rate hike of either 75 or 100 basis points this Wednesday.
Before the merger, Ethereum dominated the market. The hype around the event peaked, especially after EthereumPoW’s plans to fork the chain materialized in August. Now that the event is over, however, traders need a new narrative to catch up. With the merger completed amid a period of macroeconomic uncertainty and with no bullish catalysts on the horizon, it’s no wonder Ethereum’s biggest update ever became a sell the news event. At least Ethereum’s fundamentals have improved as market sentiment turns and interest in crypto returns—Provided, of course, that it eventually does.
Disclosure: At the time of writing, the author of this article owned ETH and several other cryptocurrencies.