Why Ethereum falls after The Merge?

While Ethereum’s update, The Merge, went well, the price of Ether (ETH) has continued to decline in recent days. It has lost 10% in the last 24 hours and almost 25% in the last 7 days.

Difficult start to the week after a difficult weekend

Cryptocurrencies were in the red on Monday morning. According to Coinmarketcap, Bitcoin was trading at $18,500 as of 10:30 a.m., once again falling below the symbolic $20,000 threshold. Cryptocurrencies lost 16% of their value in one week and 8% in one day.

On its own, Ether isn’t faring much better: the asset is trading at $1,300 and has lost more than 25% of its value in a week, including 10% since this Sunday, returning to its highest low since July.

“Sell the news” is a well-known adage among equity and crypto investors, and it’s likely that the transition from proof-of-work (PoW) to proof-of-stake (PoS) has in fact been “considered” for a long time. In fact, investors had already factored future Ethereum updates into their purchase price for a long time.

Market participants and investors had been anticipating this update and its impact on the Ethereum network for months. So now that the update is going well, these investors are selling their ETH because they took advantage of the price rally that preceded this update. A telltale sign is the amount of ETH that has recently been deposited on exchanges. However, this may also be due to the ETHPoW hard fork. Investors buying ETH to receive ETHPoW and then reselling them immediately afterwards.

As a result, the total cryptocurrency market capitalization continues to decline, standing at $900 billion on Monday, well below the symbolic $1 trillion threshold. As a reminder, this capital reached a historic record of around 2.8 trillion dollars last November.

These assets continue to correlate with traditional markets, which remain stretched as the Federal Reserve prepares for another monetary policy meeting on Tuesday and Wednesday, with another rate hike expected to be announced.

In general, the stock market is penalized for risk aversion, while cryptocurrencies are part of a risky asset class and are therefore penalized for lower investment by individuals and professionals.

Proof of Stake in the crosshairs of the SEC

If ether falls faster than bitcoin, it is also due to the specific context. Last week, the Ethereum blockchain successfully completed the merger called The Merge. The shift from a “proof-of-work” operational model to a “proof-of-stake” operational model has not left the American stock market police indifferent.

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has announced that Ethereum’s move to proof-of-stake could drop ETH into the security token category. In fact, those who own Ether can earn financial rewards through staking. This is not the case with Bitcoin, which is not considered a security token.

If Ethereum, and not its currency, Ether, were considered a security token, it would mean many obligations for companies operating on the network, such as investor protection. This can be complex, with the risk of hacking smart contracts or otherwise.

It is not Ethereum specifically that is in the crosshairs of the SEC but the Proof of Stake mechanism. However, this information becomes public only a few days after The Merge, so Ethereum seems particularly targeted.

While many investment funds, banks and other entities already own Ether, the market expects this trend to continue in the coming months. The fact that Ethereum is now “green” with almost 99.95% less electricity consumption could make it an ESG investment.

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Why Ethereum falls after The Merge?


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