1 Year Later, What Have We Learned From Ethereum and The Merge?
On Sept. 15, Ethereum (CRYPTO: ETH) will celebrate the one-year anniversary of The Merge — a technological tour de force that was easily one of the most hyped and anticipated events of 2022 for the crypto market. One year ago, investors salivated at the thought of what impact The Merge might have on Ethereum’s future price. Ethereum is still trading under $1,650, at almost exactly the same price that it was 12 months ago.
This raises an interesting question: What exactly have we learned from Ethereum and The Merge? And how can those lessons be applied when evaluating other cryptocurrencies? Let’s take a closer look.
Tech upgrades
Perhaps the biggest lesson here is that tech upgrades, no matter how big, do not always lead to huge price increases. This is an important point to keep in mind, based on how much hype many of these tech upgrades get. They are usually presented as major catalysts capable of sending a crypto soaring. But the truth might be quite different.
What’s interesting in the case of Ethereum is that The Merge was a truly transformational change and theoretically should have had a dramatic impact on Ethereum’s price. The Merge transformed Ethereum from an old, energy-intensive, proof-of-work blockchain into a modern, energy-efficient, proof-of-stake blockchain. So, The Merge was a very different type of event than a typical annual upgrade that many blockchains undergo, and yet it still didn’t have an appreciable impact on Ethereum’s price.
From my perspective, it means that the “tech upgrade = growth catalyst” investment thesis is no longer useful for evaluating cryptocurrencies. Going forward, you can pretty much assume that either the market is going to price in these upgrades as they are announced or the market is going to ignore the upgrade entirely. So, trying to time your investment decisions around key upgrades is not likely to be an effective strategy.
Regulatory risk
The second big lesson from The Merge is that new business models can lead to new regulatory headaches. As soon as Ethereum became a proof-of-stake blockchain, it meant that there was going to be much more of a focus on crypto staking, which is the process of “locking up” your crypto in exchange for a financial reward. Until The Merge, crypto staking was a sleepy backwater of the crypto industry. But after The Merge, everyone was trying to figure out how to capture those financial rewards.
And that included, unfortunately, the Securities and Exchange Commission (SEC). From the perspective of SEC chairman Gary Gensler, new crypto-staking products sounded a lot like securities, and he vowed to take a closer look. In February, the SEC ended up going after cryptocurrency exchange Kraken for its crypto-staking activities, and that immediately got the attention of the market. Right now, Coinbase Global (COIN -3.03%) is locked in an epic battle with the SEC over the future of crypto staking.
If you parse through all the filings, documents, and back-and-forth between market participants and regulatory authorities, it sounds a lot like the SEC is not so much opposed to the concept of staking as it is to the way staking is marketed to retail investors, who might think it’s a no-brainer, no-risk guaranteed return of some kind. But still, if you’re an investor in Ethereum, you have to be aware that some regulatory risk does exist here, and it was all brought about by a change in business model (i.e., the shift from mining to staking).
