Why Ethereum's Merge Was "Sell the News"

Ethereum Hit in Post-Merge Selloffs

After the highly anticipated "Merge" event that took place a week ago, cryptocurrency traders are making a mad dash to sell their Ethereum.

Since it switched to using a Proof-of-Stake consensus mechanism early on Thursday morning, the world's second-largest blockchain has seen significant value drop off as a result. When the Merge was released, the price of ETH was slightly above $1,606; however, since then, it has dropped by around 17.8% and is currently trading at $1,320.

In the days leading up to the event, ETH demonstrated a lack of strength, and its price took a fall on Wednesday as the U.S. Consumer Price Index reported an inflation rate that was 8.3% higher than projected. The data from CoinGecko show that its price has decreased by 25.1% during the previous week.

The selloff of Ethereum occurs at a time when market instability affects the majority of major crypto assets. After several months of declines in price, September is usually a bad month for cryptocurrencies, and recent market activity has made the situation even worse for crypto investors hoping for a rebound. On Monday, the price of bitcoin fell below $19,000, and it is currently trading at $18,684. Tokens that are tied to Ethereum, such as Ethereum Classic and Lido, have also suffered during this slump, with their market values falling by 12.6% and 9%, respectively, over the course of the previous day. After reaching as high as $50 on certain exchanges in the days leading up to the Merge, the price of ETHW, the native token for the Proof-of-Work Ethereum chain that was released after the event, has since dropped to $5.49.

ETH holders had high hopes that the Merge would serve as a catalyst for strong price movement for Ethereum's native asset; however, it appears that the event was negatively impacted by the "sell the news" effect. In the context of the financial markets, a common turn of phrase is "buy the rumor and sell the news." It is the act of purchasing an asset in advance of a significant event in the belief that the price of the asset will afterwards increase, followed by the practice of selling the asset after the event has taken place. The initial public offering (IPO) of Coinbase on the Nasdaq was another example of a "sell the news" event; many market participants hoped that the U.S. exchange's listing would propel Bitcoin to $100,000 following the event; however, the leading cryptocurrency reached a high of $64,000 on the day of the event, and then lost over fifty percent of its market value in the space of six weeks.

Modifications to Ethereum

There was a great deal of anticipation surrounding the Merge, in part because it had been in the works for a number of years and in part because it represented such an impressive technological achievement. The move from Proof-of-Work to Proof-of-Stake has been discussed by Vitalik Buterin, one of the co-founders of Ethereum, ever since the genesis of the blockchain. He regularly drew similarities to an airplane changing its engine in the middle of its flight.

After the successful completion of the Merge, Ethereum implemented a number of significant improvements. The first stage, and without a doubt Ethereum's most significant step to date in preparation for general adoption, was the blockchain's decision to stop using Proof-of-Work miners, which resulted in a reduction in energy consumption of approximately 99.95 percent. The Merge was covered by a number of mainstream news publications when it shipped out the previous week, including The Guardian, The Independent, and Financial Times, with the primary focus being on comments of the blockchain's improved carbon footprint.

In addition, as a result of Ethereum's transition from Proof-of-Work to Proof-of-Stake, the issuance of ether has been reduced by around 90 percent because it is no longer necessary to pay miners. The amount of Ethereum that is now in circulation has increased by approximately 3,000 ETH since the Merge, according to data provided by ultrasound.money. This is significantly less than the 53,000 ETH that would have been paid out if Proof-of-Work had been used. People like Arthur Hayes described the Merge move as "a no-brainer" based on the fundamental switch because of the reduction in issuance, which was universally lauded as a bullish catalyst for ETH.

The possibility of institutional investors deploying capital in ETH fueled a narrative that the Merge would help the asset surge, and ETH holders can earn yields of around 4% by staking their assets to secure the network. Additionally, the move to a more ESG-friendly consensus mechanism fueled the narrative that the Merge would help the asset surge.

A Reaction That Is Laggard

Despite the fact that Ethereum has implemented a number of changes, there are a number of possible explanations for why ETH has not responded in the way that its most ardent supporters had anticipated it would. The amount of available Ethereum is gradually decreasing over the course of time. It is highly likely that the market will require some time to comprehend the impact of such a significant change. This is analogous to how the value of Bitcoin typically does not begin to increase until several months following one of its "halving" incidents. It is possible that market participants would wait to see how the shift plays out before investing in ETH. This is because the supply cut might possibly cause ETH to become a deflationary asset, also known as "ultrasound" in the Ethereum ecosystem.

In a similar vein, Ethereum may have to wait for some time before hedge funds and other major players engage in ETH, despite the fact that the transition has given it a reputation for being environmentally friendly (institutions and traditional finance firms tend to move slower than crypto-native investors). It is also unlikely that the Merge will change the way that the general public views cryptocurrency and the climate cost associated with it. In 2021, the entire asset class became the focus of inquiry about the influence that Proof-of-Work mining had on the environment, and it is arguable that the climate crisis has been a substantial hurdle in the way of widespread adoption of cryptocurrencies. Even though Ethereum has reduced its energy consumption, Proof-of-Work is still used by the most valuable cryptocurrency in the world, and it most likely will be for many years to come. Even if potential investors are aware that Ethereum uses Proof-of-Stake, they may still be hesitant to invest in cryptocurrencies because of the amount of energy that Bitcoin consumes. As was the case with the reduction in the amount of ETH that was issued, it could be months or even years before the decrease in energy use boosts the appeal of Ethereum among institutional and retail investors alike.

The Big Picture in Microcosm

In addition to the Ethereum Merge itself, the larger crypto market as a whole as well as its position within the present macroeconomic environment can help to explain why ETH is trading lower. Along with Ethereum, Bitcoin is currently trading at a price that is almost 70 percent lower than its all-time high, which has led to a decline in the cryptocurrency market that has lasted for over an entire year. Cryptocurrencies have suffered significant losses in 2022, trading in close association with regular equity markets and being subject to the whims of the Federal Reserve and its continuous economic policy of tightening monetary conditions. The Federal Reserve has been increasing interest rates throughout the year as a response to skyrocketing inflation. As a direct consequence of these rate increases, riskier assets have performed poorly. The most recent comments made by Fed Chair Jerome Powell, in which he hinted that there will be more "pain" in the future, are suggestive of the possibility of additional rate hikes, particularly in light of the fact that the most recent inflation data came in higher than expected the week before. The Federal Reserve has stated that it intends to reduce inflation down to 2%; on Wednesday, the U.S. central bank is expected to announce a further increase in interest rates of either 75 or 100 basis points.

Before the Merge, Ethereum was the dominant cryptocurrency in the market. The level of excitement around the event reached a fever pitch, particularly following the successful execution in August of EthereumPoW's plans to split the chain. However, given that the event in question has already taken place, market participants require a fresh story to rally behind. It should come as no surprise that Ethereum's greatest upgrade ever turned into a "sell the news" event, considering that the Merge was completed during a moment of macroeconomic instability, and there are currently no bullish catalysts on the horizon. At least Ethereum's fundamentals have gotten stronger in preparation for when market mood changes and interest in cryptocurrencies comes back, presuming that this will happen at some point.


Orizu Ebube

1165 Blog posts

Comments
Abiola Issa Mukaila 10 w

Good