It has finally happened. The long awaited Ethereum merge is complete and a new era for the second largest cryptocurrency has begun.
Ethereum has switched from a proof-of-work system to a proof-of-stake system and drastically reduces the amount of energy it uses. The Ethereum team says energy consumption has been reduced by 99.95%. Energy and cryptocurrency has been a long contested topic which hit the mainstream once Elon Musk tweeted about it.
For those that don’t know, before the merge Ethereum used 112 terawatt hours annually. That’s more electricity than Pakistan uses in a year. Bitcoin is more, consuming more electricity than Argentina, Finland, the Netherlands and the UAE just to name a few countries.
How will this affect you as a holder or trader? Well not much. It really has a larger impact on those who mined Ethereum. Instead of Ethereum having tons of miners with powerful and energy-intensive computers trying to solve mathematical equations for Ethereum, only one computer is selected to validate the transaction and the validator must deposit or stake 32 ETH. If the transaction is validated successfully, the validator will receive the transaction fees as a reward.
Energy efficiency is the real takeaway.
So what next? Well things go on as normal. However, in the hours and days ahead, there are risks of bugs, hacks, and price instability. Some short term noise and volatility.
Many traders see the merge as a bullish move for Ethereum. With energy use reduced, it may open the door for more institutional investors to buy Ether as they try to shift optics towards an ESG investing philosophy.
Katie Talati, head of research at asset management firm Arca believes post-merge, Ethereum is going to rise due to scarcity. The proof-of-stake model, which is replacing the proof-of-work model, requires validators on the network to put up their ether tokens, or “stake” them (remember the 32 ETH), essentially pulling them out of circulation for an extended period of time, in order to secure the network.
“For probably six to 12 months — there’s no defined guidance yet from developers on Ethereum — you will not be able to withdraw your Ethereum once you’ve staked it to validate the network,” Talati said.
A lot of eyes will be on Ethereum as this change affects a network which houses a $60 billion ecosystem of exchanges, lending companies, NFT marketplaces and other applications.
There is already some skepticism and fear given the reaction. Post-merge, Ethereum is falling hard, down over 7% in the last 24 hours. To be fair, most of the major cryptos are red, but Ethereum is down by far more.
I know I have angered many crypto bulls with my analysis these past few months. I warned of a major spill due to the technicals. A spill which triggered and will continue to make more legs lower.
Cryptocurrencies are risk on assets. Meaning when the stock market drops and there is fear, cryptos will also sell off. They follow the equity markets. With equity markets looking to drop on inflation and interest rate headlines, and let’s not forget about the strong US dollar, cryptos will have some more pain. Short the rips I say.
I know many crypto bulls were telling me the merge news would see Ethereum spike. My opinion, and I know I could be wrong, is that the only fundamental news a crypto investor needs to worry about is the Central Bank Digital Currency (CBDC) and central banks randomly deciding that they will give up the monopoly of printing money.
From a technical perspective, this sell off was expected due to market structure. We attempted to reclaim support at $1800. It looked positive at first, but then we sold off hard. The next support I am looking at comes in just above $1200. If we break that, we are looking at Ethereum sub $1000.