Llast week was a festive one for Ethereum: the second largest blockchain in the world successfully transferred to Proof of Stake after a painstaking eight-year development process. (Read more here about the importance of fusion.) But on Monday, investors woke up to the token’s price at its lowest point since July. While Ethereum climbed back to over $1,700 in September, it is now around $1,330, representing a more than 20% decline.
If the merger was supposed to solve many of Ethereum’s problems, why is its value still declining? Here are a few reasons for the current decline.
The merger is intended to have a long-term impact, not a short-term one.
When Ethereum successfully merged, many of the responsible headlines bordered on ecstasy: “The Ethereum ‘merger’ will change crypto forever,” Fortune sang. (This publication—and the writer—were certainly not immune to excitement.)
But while the developers of the merger promised many changes – including a sharp reduction in energy consumption and increased security – a short-term price increase was not one of them. The merger did not fix Ethereum’s high fees or congestion. Instead, he simply laid the groundwork for additional infrastructure that could solve his problems for years to come. Anyone hoping that Ethereum would look or work completely differently on Thursday was going to be disappointed.
Cryptocurrencies are heavily influenced by major market forces.
While crypto is designed to hold value independent of the stock market, the two are still very much intertwined. Over the past few years, tokens like Bitcoin and Ether have risen and fallen depending on larger market trends. Ether prices have been depressed this year since the Federal Reserve announced its intention to introduce a series of aggressive interest rate hikes in order to fight inflation. High interest rates dissuade consumers from investing in riskier assets, which includes crypto.
Read more: Why Bitcoin Keeps Crashing
And last Tuesday – two days before the merger – the consumer price index report shown that US inflation remains stubbornly high. More inflation means higher interest rates: Federal Reserve chairman Jerome Powell responded by saying the central bank needed to act “outspoken, decisive” to fight inflation. And the market responded in turn: The Dow Jones Industrial Average fell more than 1,200 points, doing so the index’s worst day since June 2020. Ether, naturally, fell on the back of the decline. The Federal Reserve’s decision on a potential hike is expected to be released this Wednesday.
Investors worry about regulations.
Is Ether a security? The issue has been debated since Ethereum’s inception, with blockchain developers hoping to avoid the transition of Test Howie (the set of criteria that determines whether something is a security) and thus saves Ethereum from much stricter regulatory oversight. For years, Ethereum leaders argued that the token was decentralized enough, and regulators stayed away.
But last Thursday, SEC Chairman Gary Gensler said that a token using Proof of Stake could help pass the Howey test. “From a coin perspective … this is another indication that under the Howie test, the investing public expects gains based on the efforts of others,” Mr. Gensler told reporters after a congressional hearing. According to to the Wall Street Journal. Given that Ethereum just moved to Proof of Stake, many investors on social media expressed concern that Ethereum could be Gensler’s next target.
However, some crypto-focused lawyers say there is a long way to go from Gensler’s comments to Ether being classified as a security. “The case for a token becoming a security isn’t really that strong,” says Collins Belton, a prominent crypto attorney and managing partner of the law firm Brookwood. “The main 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 were to successfully designate Ether as a security, their logic would mean they would have to do the same and for Proof of Work coins like Bitcoin.
Long-term investors come into conflict with day traders.
Internal dynamics within the Ethereum community were also at play this week. Last week, as it became increasingly clear that the merger would be successful, many Ethereum fans bought the token based on the belief that the transition bodes well for its long-term success. Ethereum developers and boosters like to use the term “ultrasonic money,” which describes the belief that the value of the token will be able to withstand a global war, economic collapse or other major disasters.
This activity drove up the price of Ether – which in turn prompted day traders who bought the coin purely for economic reasons to cash out of the spike in value. Their activity then pushed the price back down. It was a prime example of a long-standing tension in crypto: There are many different types of crypto investors, and sometimes those who believe in the technology for its long-term, transformative abilities are at odds with those who just want to make a quick buck.
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