How the Ethereum Merge Changes the Cryptocurrency Marketplace

The Ethereum merge went through without a hiccup, except the Ether price did fall over 10%, 15% top to bottom. The event that cryptocurrency investors had been excited about for a long time. The Ethereum crypto network runs Ether, the world’s second-most-valuable digital currency merged early Sept. 15. The migration of Ethereum to proof-of-stake has created much excitement since the successful merge in testnet. The Merge will change how transactions on Ethereum are ordered with the aim for the network to consume less electricity and run more efficiently.

The software upgrade is called the Merge because the existing Ethereum blockchain will combine with a parallel network that’s been running for almost two years to test the proof-of-stake concept.


The “Merge,” upgrade transition of the Ethereum network to the proof-of-stake model went through around 2:45 a.m. ET Thursday.

Ether fell after the event, in a buy the fact event it appears. ETH was recently trading at $1,491.71 in afternoon trading in New York, down about 7% from its 5 p.m. ET level Wednesday.

via WSJ
via KnovaWave

Energy Saving

The “Merge” will lower Ethereum’s energy use by 99%, in a time of a global energy crisis and pinpointing bitcoin miners for its electricity consumption. The advantage is Ether post-Merge will move closer to having traits of a traditional financial asset paying interest. There is a thought that this would make ether more acceptable to traditional investors such as hedge funds, asset managers, and wealthy individuals. The new software is being touted as speeding up transactions and lower fees. At the last Ether test for merge the gap with Bitcoin in value closed. There are hopes by Ether players that this tightened.

The fundamental shift in the way Ethereum works and behaves will change the cryptocurrency landscape.

Vitalik Buterin back in 2014 at age 20 described Ethereum’s decentralized network of computers race to solve mathematical puzzles, competing for the right to order transactions and add blocks of data to a digital ledger. Owners of the computers, who are called miners make sure the ledger can’t be tampered with. For this in return these miners are rewarded with Ether. Bitcoin uses a similar system, called proof of work.

Following the merge Ethereum’s new process will rely instead on what’s called proof of stake. What this means it doesn’t depend on miners. This will require entities called validators with Ether coins. Staking comes from the action of supporting by the coins bought. This gives large Ether owners the right to add a block of transactions to the ledger; they’re rewarded with new Ether when they do so. All Ether tokens after the merge will pay interest when placed into staking wallets.

Ether owners who stake their coins can get around 4% now, and that’s expected to rise post-Merge. Bloomberg reports that as much as 80% of all Ether supply, about $170 billion at current prices could eventually be staked, according to ConsenSys, an Ethereum blockchain technology provider.

“I think that Ethereum’s merge fundamentally changes the asset,” says Jack Neureuter, research analyst at Fidelity Digital Assets, a unit of Fidelity Investments Inc. that plans to offer custody and trading in Ether later this year. “It fundamentally changes the investment case around it.”

The Risks

Not everyone is a believer, many still see this as just another crypto ploy Bitcoin purists see staking as a waste.

“So long as security has a cost, that cost has to come from somewhere,” says Christopher Bendiksen, an analyst at CoinShares, an asset manager. In proof of work, it comes from energy and hardware, he says, while in proof of stake “it comes from hoarding capital.”

The new safety being touted is an illusion when staking Ether says Campbell Harvey, professor of finance at Duke University. Any interest “is paid with a currency that has, like, 90% volatility, and it’s going through a major change,” he says. While treasury bonds have been incredibly volatile in 2022 with the inflation surge, the security of the full faith and credit of the US government remains and is not typically this volatile in prices.

For existing Ether investors, the risk is different for staked coins as they are already taking that risk and now being paid for it. Investors now can also benchmark staked Ether against other investments.

“It’s not risk-free, but it gets you close,” says Henry Elder, head of decentralized finance at Wave Financial Group, an investment manager. “This is something that crypto really struggled with: How do you compare asset managers, how do you compare performance? I think that’s super important, because when you get to institutional investors, that’s the language that they speak.”

Ether overtaking Bitcoin in value is known as “flippening”. Jeff Dorman, chief investment officer at Arca sees this happening “I do think Ethereum will flip Bitcoin probably sooner than people think. Every success story you are seeing on blockchain is happening on Ethereum.”

Fidelity’s Neureuter says Bitcoin has “fossilized” and the Merge could also solidify Ethereum’s position as the most important crypto commercial highway once additional changes make the network faster and cheaper to use.

“At the end of the day, a network is only as valuable as the number of people using and deriving value from it,” says David Kroger, digital data scientist at Cowen Inc.

In August, the biggest US crypto exchange, operated by Coinbase Global Inc., announced a derivative token representing staked Ether that users will be able to trade, lend, or borrow. In the future, it may be possible to take out a loan against staked Ether, with interest on the loan paid with staking yield.

“It gives more and more people the opportunity to be stakeholders in Ethereum,” says Paul Veradittakit, a partner at Pantera Capital, which manages crypto hedge funds. “It can bring a larger pool of capital from traditional finance.”

SEC Re-rating Ether as a Security

There is a catch, until Ethereum undergoes another software upgrade, likely six months away at least, staked Ether can’t be withdrawn. Even then, withdrawals will be limited. The other risk is the Securities and Exchange Commission could react should the coin’s properties change. Ether’s decentralized nature, simply its lack of a formal intermediary has kept the SEC out.

SEC’s current chair, Gary Gensler has repeatedly called the “vast majority” of crypto coins securities, may see Ethereum’s changes falling into his lap. With staked Ether people will be investing money, which is one of the key characteristics of a security. “I definitely think this is a move that will make it far more likely that any court or regulator would view it as a security,” says Dara Tarkowski, managing partner at Actuate Law. Back in August, Coinbase disclosed that it received SEC subpoenas and requests for documents, some of which related to its staking program.

Given all that the risk is that of the crypto market itself. The crypto market has lost around $2 trillion in value since November.

Source: Bloomberg

From the TradersCommunity Research Desk