Ethereum drops more than 17% after ‘way overhyped’ Merge

Four days ago, just a few minutes before 3 a.m. EDT, a long-anticipated upgrade to Ethereum was executed. Since then, the second most valuable blockchain’s cryptocurrency, ETH, has tumbled — and some are saying its price hasn’t bottomed out yet.

When the upgrade, generally referred to as “the Merge,” transpired, ETH was priced at about $1,600. At the time of publication, ETH is worth about $1,327 down just over 17% from the landmark system change.

“The FOMO and speculation around the Merge are done, and it’s back to business as usual for most in the space.” Flux co-founder Daniel Keller

Over the past several months, speculation has centered around whether ETH would be accepted post-Merge, Daniel Keller, co-founder of a decentralized cloud infrastructure Flux, told TechCrunch. Since Ethereum moved from proof-of-work (PoW) to proof-of-stake (PoS), it left its crypto miners “behind” in the transition, he added.

“Did they alienate a core demographic and remove one of the best parts of decentralization? I think we see the direct impact of that speculation to the downside,” Keller said.

While the Merge was certainly a feat of engineering, it’s important to remember that there are many PoS chains that exist at scale — just not at the scale of Ethereum, noted Nick Dazé, CEO of blockchain-based platform Heirloom.

“This was a ‘buy a rumor, sell the news’ type event,” Dazé told TechCrunch. “The pump [prior to the Merge] was from pure speculation.”

“The Merge was way overhyped,” Dazé said. “The feat accomplished was less about technology and more about scale. The market is digesting this now.”

As for the downward pressure on ETH’s price, there are a number of factors at play, sources said.

As we have seen with most crypto-based assets, the monetary policy of the U.S. is impacting the overall markets, including crypto, which is in lockstep with the equities market, Keller said. “Many would call this ‘baked in’ to the current down cycle; however, there are very few signs of a reversal moving forward.”

Others broadly agreed with Keller.

“We’re in a general market risk-off right now, especially with the recent inflation numbers, upcoming Fed meeting and multiple other central banks also meeting this week,” Larry Florio, general counsel at mobile investment platform Delphia, said to TechCrunch. “Add on that the crypto market specifically is still in a relative bear market and people have not seen ETH flip deflationary the way that I think many people expected.”

Additionally, crypto has a positive beta to traditional markets, Dazé said, which means it swings more wildly and has more volatility than the overall market. “So, when markets pull back, statistically, crypto pulls back harder.”

Dazé noted that the blockchain is “extremely centralized” thanks to the four major crypto entities (Lido, Coinbase, Kraken and Binance) controlling over half of all staked ETH. (“Staking” ETH is when someone locks up their tokens for a certain period of time to support — or validate — the network. In return for their contribution, stakers can potentially earn rewards, which are expected to double to 8% APY post-Merge.)

There also isn’t a method to undelegate staked sums of ETH, which are locked into these validators for nine to 12 months, Dazé said. “The community is working on a solution but that’s where it is for now.”

“These factors plus the general downward of macro will force multiply the pressure,” Dazé said.

Dazé said he doesn’t think ETH has hit bottom, adding that he expects a range around $750 to $883 as the markets in general drop. Florio said it’s hard to say given the current market, but he “wouldn’t be surprised to see ETH dip back into three digits.”

The slide will continue unless there’s some sort of correction on the legacy financial side, Keller said. “Keep in mind that crypto will react the fastest in an upcycle due to the 24/7/365 trading opportunities and global participation.”

Once the other macro shoe drops with the energy situation in Europe this fall, the euro could deflate a bit, Dazé said. “The dollar becomes more crowded, most of the global debt is denominated in dollars, so market participants have to sell things to get dollars.”

In order for ETH’s price to recover, conventional markets will need to extend greater support, Keller said. “It’s a hard truth we need to accept that most people in the blockchain ecosystem are refugees from the legacy banking sector.”

The same tactics and mindsets in the traditional markets are ruling the crypto space, Keller thinks. “This will be an ongoing issue until there is enough liquidity to ensure market moves are less hostile.”

On a macro level, the U.S. Federal Reserve needs to indicate that it might be ending the current spree of raising rates, Florio said. “Specific to ETH, we might be into a longer consolidation period until a catalyst dramatically increases on-chain activity.”

Post-Merge, the world has come back to reality, Keller said. “The FOMO and speculation around the Merge are done, and it’s back to business as usual for most in the space.”

All eyes are now on legacy finance to address the inflation and stagnant economic model, Keller commented. Also, with the impending corrections in other areas like the housing market, “we are in for a long ride,” he added.

“Historically crypto is a very circular asset, so there will be a trigger that will send it back north,” Keller said. “The question is when and how aggressive. Micro markets like crypto tend to move quickly in both directions, so be ready for both scenarios.”