Monday, January 30, 2023

Investors have been pondering why the value of Ethereum has plummeted despite the Merge being hailed as a viable solution to several of Ethereum’s woes.

  • Ethereum’s historical transition from proof-of-work to proof-of-stake signalled the end of its decentralised ledger’s energy-intensive, miner-based approach previously used in processing changes.
  • While Ethereum had risen to almost $1700 in September, the price is now hovering around $1300, representing a 46% slump.
  • The link between crypto assets and conventional holdings like equities has considerably risen as adoption surges.

One of the most significant advancements in crypto history occurred on September 15, 2022, when the blockchain Ethereum completed a software upgrade known as “the Merge.” Ethereum’s historical transition from proof-of-work to proof-of-stake signalled the end of its decentralised ledger’s energy-intensive, miner-based approach previously used in processing changes.

Immediately following the Merge, investors woke up to find the token’s price at its lowest price since July. While Ethereum had risen to almost $1700 in September, the price is now hovering around $1300, representing a 46% slump.

READ: The explainer: the Ethereum merge and what it means for crypto investors

Investors have been pondering why the value of Ethereum has plummeted despite the Merge being hailed as a viable solution to several of Ethereum’s woes. Nonetheless, there are various causes behind Ethereum’s post-Merge slump.

Ethereum’s  post-Merge effect is more long-term than short-term

In the crypto community, the Merge was celebrated like a holiday, both digitally and physically, with watch parties that included speeches, music, and even special guest. Various viewers were even more excited by the Merge’s overnight occurrence in many parts of the planet.

The anticipation reached a boiling point when, in a split second, the world flickered from one reality to another. Excitement was followed by expectations that the Merge would completely transform the entire crypto ecosystem.

A short-term price hike was not among the promises made by the Merge developers, who pledged to reduce energy use and improve security drastically. The Merge did not resolve high costs and congestion on Ethereum. The upgrade established the foundation for further infrastructure to address its issues in the following years. Anyone expecting Ethereum to operate or appear entirely different overnight got disappointed. However, there are already indications of alteration in the network.

The Merge’s effect on the issuance rate of ETH, the network’s native currency, has been the most noticeable on-chain effect. The network substantially lowered the quantity of fresh ETH released with each block once Ethereum switched to proof-of-stake.

A burning mechanism included with the EIP-1559 network update can potentially render Ethereum deflationary in the long run, meaning its token supply may fall over time.

Although the price of ETH has fallen dramatically following the Merge, many people within the Ethereum space have pointed out the lower supply as a reason for holders to hang onto hope. Since fewer ETH are in use, each token should hold more value.

The major market forces influence Ethereum’s post-Merge prices

The link between crypto assets and conventional holdings like equities has considerably risen as adoption surges. Crypto assets like Bitcoin and Ether had no association with the main stock indexes before the pandemic.  Many people formerly associated crypto with risk diversification and serving as a hedge against fluctuations in other asset groups.

However, the unusual central bank reactions to the 2020 financial crisis changed things. With challenging global economic conditions and increased investor risk appetite, stock and cryptocurrency prices have increased globally. In developing market nations, some of which have been at the forefront of adopting crypto-assets, there is still a higher correlation between cryptocurrency and stocks.

READ: Ethereum in Africa; A plethora of opportunities

Contrary to initial expectations, the correlation between stocks and cryptocurrencies has turned out to be larger than that between stocks and other assets like gold, investment-grade bonds, and major currencies, indicating modest risk diversification advantages.

The likelihood of investor emotion spreading across those assets remains more likely with the increased connection between cryptocurrencies and equities. An analysis of the price and volatility spillovers between the cryptocurrency and global equities markets indicates that the amount of volatility and return spillovers from the crypto market to the stock market and vice versa increased dramatically in 2020–21 compared to 2017–19.

Financial market systems have fully integrated cryptocurrency as assets. Bitcoin and Ethereum’s value have risen and fallen in tandem with broad market patterns due to the link. As banking organizations raise interest rates to offset the recent decline in global inflation, the price of Ether has fallen. With high-interest rates, consumers keep off riskier assets, such as cryptocurrency.

Ethereum and crypto investors’ regulatory concerns

Ethereum’s post-Merge market downturn. web3africa.news

Ethereum’s post-Merge market downturn. [PHOTO/COINDESK]

Is Ether a security? Since the very inception of Ethereum, this issue has been up for discussion. Ethereum’s creators hoped to avoid passing the Howey Test (the set of standards that decides whether something is security) and so shield Ethereum from much greater governmental monitoring. Regulators have mostly refrained from intervening since Ethereum founders have always given assurances about adequate decentralized of the network.

According to experts, a cryptocurrency that uses Proof of Stake may help it pass the Howey Test. From the viewpoint of the ETH currency, further indicators suggest that, per the Howey test, the investing public is expecting gains based on the efforts of others.

However, other advocates specializing in crypto argue that it will take time to recognize Ether as a security. Collins Belton, a well-known cryptocurrency attorney and managing partner of the law firm Brookwood, claims that the justifications for a token becoming security are not all that compelling.

The software used and the necessary hardware is the primary variations between Proof of Stake and Proof of Work. Collins thinks that even if Ether were successfully classified as a security, it stands to reason that Proof of Work coinage like Bitcoin would also fall under this classification.

The conflict between daily traders and long-term investors has affected Ethereum’s post-Merge value

In the period after the Merge, internal forces were also at work inside the Ethereum community. Many supporters of Ethereum invested in the token as it became more evident that the Merge would be successful because they thought the change was favourable for the cryptocurrency’s long-term growth.

The phrase “ultrasound money,” which refers to the conviction that the token’s value would be able to weather world war, economic collapse, or other significant tragedies, is a favourite among Ethereum developers and supporters.

This activity raised Ethereum’s value, encouraging day traders who had invested in the token only for financial gain to profit from the increase in value. The price then decreased as a result of their actions. It was a prime example of a long-standing conflict in cryptocurrency: Many different types of cryptocurrency investors exist. Occasionally, those who support the technology for its potential long-term, transformational effects clash with those only interested in making quick returns.

READ: Africa: The urgent need for regulations to protect crypto investors from fraud and scams

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