Why the Ethereum Merger Was a “Sell the News” Event

Key points to remember

  • Ethereum has successfully shipped 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 improvements, it will probably take time for the market to digest the event.
  • The weak macro environment has been a major factor weighing on ETH and other crypto assets this year.

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Ethereum made history when it completed the Proof-of-Stake “merger” last week, but ETH has suffered a steep drop since the update.

Ethereum hits post-merger selloff

Crypto traders are rushing to sell their Ethereum after last week’s highly anticipated “Merge” event.

The world’s second-largest blockchain has recorded heavy losses since transitioning to a Proof-of-Stake consensus mechanism early Thursday. ETH was trading just above $1,606 when the merger shipped, but has since fallen around 17.8%, trading at $1,320 at press time.

ETH/USD (Source: CoinGecko)

ETH showed weakness in the build-up to the event, taking a hit on Wednesday as the US consumer price index recorded an inflation rate 8.3% higher than expected. According to data from CoinGecko, it is down 25.1% over the past week.

The Ethereum selloff comes as most major crypto assets are suffering from market volatility. September has always been a weak month for crypto prices, and recent market action has added to the pain for crypto hopefuls after months of selling off. Bitcoin fell below $19,000 on Monday, currently trading at $18,684. Ethereum-linked tokens like Ethereum Classic and Lido also slid lower, shrinking their market values ​​by 12.6% and 9% respectively in the past 24 hours. ETHW, the native token of the Proof-of-Work Ethereum chain launched after the merger, fell to $5.49 after surging above $50 on some exchanges ahead of the event.

While ETH holders had pinned their hopes on the merger serving as a catalyst for bullish price action on Ethereum’s native asset, the event appears to have suffered from the “sell the news” effect. “Buy the rumour, sell the information” is a popular phrase in financial markets. It refers to the practice of buying an asset before a major event in anticipation of a price rise before selling the asset afterwards. The Coinbase IPO on the Nasdaq was another example of a “sell the news” event; many market participants hoped that the US exchange listing would propel Bitcoin to $100,000 after the event, but the top crypto peaked at $64,000 the same day and then lost over 50% of its market value in the space of six weeks.

Changes to Ethereum

The anticipation for the merger was high, partly because it took years to prepare and partly because it was a major technological feat. Discussed by Ethereum co-founder Vitalik Buterin since the blockchain’s inception, the transition from proof-of-work to proof-of-stake has frequently drawn comparisons to an airplane changing engines mid-flight.

After the merger was completed, Ethereum introduced several significant changes. First, and arguably Ethereum’s most important step in preparing for mainstream adoption to date, the blockchain reduced its power consumption by approximately 99.95% by dropping proof-of-work miners. Several mainstream media outlets, including The Guardian, The Independentand FinancialTimesreported on the merger as it was shipped last week, leading to discussions on improving the blockchain’s carbon footprint.

Additionally, Ethereum has reduced its ETH issuance by around 90% with the move to proof-of-stake since it no longer needs to pay miners. According ultrasound data.money, the circulating supply of ETH has increased by around 3,000 ETH since the merger, compared to the 53,000 ETH it would have paid as part of the proof of work. The emissions cut has been widely hailed as a bullish catalyst for ETH, with the likes of Arthur Hayes describing the merge trade as “An evidence” based on the fundamental switch.

ETH holders can earn returns of around 4% by staking their assets to secure the network, and with the shift to a more ESG-friendly consensus mechanism, the ability for institutional investors to deploy capital into ETH fueled a narrative that the merger would help the surge asset.

A delayed reaction

Although Ethereum has introduced several improvements, several factors could explain why ETH has not responded as its biggest fans hoped. The reduction in the supply of ETH happens gradually over time. It is likely that the market will need time to process the impact of such a major change, similar to how Bitcoin only tends to appreciate months after its “halving” events. With the reduction in supply, ETH could theoretically become a deflationary asset, or “ultrasound” as it has been dubbed in the Ethereum community, but market participants can wait to see how the change unfolds before buying. in ETH.

Likewise, although Ethereum has gained green credentials with the change, it could take some time for hedge funds and other big players to invest in ETH (traditional financial institutions and firms tend to move slower than crypto-native investors). The merger is also unlikely to transform the mainstream perception of crypto and its climate cost. The entire asset class has come under intense scrutiny in 2021 over the environmental impact of proof-of-work mining and the climate issue has arguably been a significant barrier to adoption. massive. While Ethereum has reduced its power consumption, the world’s largest cryptocurrency still uses proof of work and will likely do so for many years to come. Even though potential investors know that Ethereum uses proof-of-stake, they may still have a crypto aversion due to Bitcoin’s power consumption. Similar to the reduction in ETH emissions, it could take months or years for the reduction in energy consumption to improve Ethereum’s appeal to institutional and retail investors.

macro image

Besides the Ethereum merger itself, the broader crypto market and its place in the current macro climate may be part of the reason why ETH is down. Like Ethereum, Bitcoin is over 70% off its November 2021 peak, driving the crypto market to a nearly year-long slide. Cryptocurrencies traded in close correlation with traditional stocks in 2022, suffering steep losses at the mercy of the Federal Reserve and its ongoing economic tightening policy. In response to soaring inflation, the Fed raised interest rates throughout the year, and risky assets suffered. The latest indications from Fed Chairman Jerome Powell of further “pains” to come suggest further upside could be in store, particularly after the latest inflation data topped estimates last week. The Fed has said it wants to bring inflation down to 2%; the US central bank is expected to announce another rate hike of 75 or 100 basis points on Wednesday.

Prior to the merger, Ethereum dominated the market. The hype for the event reached fever pitch, especially after EthereumPoW’s plans to fork the chain came to fruition in August. However, now that the event has passed, traders need a new narrative to follow. With the merger complete amid a period of macro uncertainty and no bullish catalyst on the horizon, it’s no wonder Ethereum’s biggest update ever turned into a ‘sell the news’ event. “. At least Ethereum fundamentals have improved as market sentiment swings and interest in crypto returnsassuming that is the case at some point, of course.

Disclosure: At the time of writing this article, the author of this article owned ETH and several other cryptocurrencies.

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