Jamie McNeill
Since the merge last week, the Ethereum price hasn’t fared so well, and has crashed over 20% in the lack week to where it is now, just under $1,300. There are many reasons for why this may be, and none of these reasons ought to concern long term holders with conviction.
1) Buy the rumour, sell the news
It isn’t an uncommon practice in crypto, especially amongst traders, to “buy the rumour” and “sell the news”. In the lead up to the Ethereum merge, one could argue that Ethereum hasn’t fared so badly, especially when compared with other large caps.
The merge occurred in the context of a much broader bear market, during which prices for almost all assets are down significantly, and there was still a reasonable degree of uncertainty: it would make logical sense that post-merge ETH is a less risky asset since there are fewer variables, and that this should in turn justify a higher price.
However, it seems that enough traders decided to take profits and move out of the asset that the price of ETH fell to where it stands now, well below $1,300.
2) Investors sell Ethereum as interest rates rise
When interest rates rise, risk-on assets tend to fall in value, and when interest rates fall, they tend to appreciate. Ethereum is an extremely clear example of a risk-on asset, given that it isn’t the most secure or immutable cryptocurrency and is still relatively new – the consensus mechanism that Ethereum currently uses has only been in operation for a week now.
The rise in interest rates yesterday caused a lot of volatility in the markets, and prices fluctuated dramatically. The Ethereum price, in particular, suffered. As access to liquidity becomes more difficult for people to come by when interest rates rise, people tend to sell their riskier assets as cash becomes a more alluring proposition in terms of risk and reward.
With the macroeconomic uncertainty at the moment, particularly with the heightening tensions in Ukraine and Taiwan, it seems quite possible, or even probable, that risk assets will continue to suffer in the short term to medium term.
3) Regulatory concerns for Ethereum
Recent progress in the case that the SEC currently has filed against Ripple shows that the way that securities are currently defined under US law may no longer be appropriate, and it is quite possible to think that in the future the preexisting laws will need to be revisited to cater for an entropic environment in technology.
Ethereum’s decision to move from proof of work to proof of stake is one that has attracted the attention of regulators, since it clearly demonstrates that there are a small number of people within the Ethereum community who can change the system for everyone else. There was even a degree of discontent that was shown by the fact that other forks such as ETHPoW gained so much traction, alongside the fact that many of the disenfranchised miners moved to Ethereum Classic, whose hash rate more than quadrupled.
Ethereum has drawn a lot of criticism for failing the Howey test. ETH was originally sold at ICO (arguably “with an expectation of profit”), it has a development team and marketing department, the merge showed that a small group of people can completely change the parameters of the network, and proof of stake is a system that rewards those who already have a stake rather than those who are rewarded for their ongoing output and contributions.
There are currently four entities that make up 59.6% of the total ETH that has been staked, meaning that thanks to the transition to proof of stake, Ethereum’s consensus layer has become far more centralised.
When compared with traditional finance, and especially when compared with government plans to introduce CBDCs, this is still relatively decentralised, and after the Shanghai update people will be able to unstake their ETH, meaning that it is possible that the pools become more decentralised over time.
However, it isn’t nearly as decentralised as Bitcoin, whose mining pools are far more resistant to this type of centralisation when compared with Ethereum staking. This is thanks to the fact that miners can switch pools extremely easily, whereas there aren’t the same mechanisms for the largest Ethereum staking providers, such as Lido, who have their staked ETH locked (at least for the time being).
When confronted with how the community would respond in the event that centralisation became too much of an existential threat to Ethereum, Vitalik has spoken many times about the possibility of a user-activated soft fork, which could prevent large players from taking over the network entirely, no matter how dominant their stake.
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This article was written for Business 2 Community by Jamie McNeill.
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