Today could be one of the biggest days in crypto history, but you wouldn’t know it from the prices. The much-anticipated Ethereum (ETH) merge switches the biggest smart contract crypto from an energy intensive proof-of-work mining model to a much more efficient proof-of-stake system.

The merge has been compared to changing a car engine while speeding down a freeway, but that doesn’t really do it justice. Maybe it would be more accurate to say it’s akin to changing the engine on a plane that doesn’t have a pilot during a transatlantic flight. Whatever metaphor you use, it’s a big deal.

Why Ethereum’s price fell in spite of the successful merge

Given the enormity of the merge, some investors may have been surprised that Ethereum’s price fell today. It slipped over 7% in the hours immediately afterward. The trouble is that while the merge may be good for the popular crypto in the long term, it also caused a lot of short-term volatility.

There are a few factors at play, most notably the “buy the rumor, sell the news” phenomenon. This is where short-term traders speculate that the price of an asset will go up around a particular event. They buy in the months before the event, only to sell shortly before or immediately after it actually happens. Crypto and equity markets are also grappling with poor inflation figures and the potential for further interest rate hikes later this month.

In the long term, the merge could be transformative for Ethereum. Here are some of the reasons why:

• It cuts Ethereum’s energy consumption. The political spotlight is increasingly on the environmental impact of proof-of-work mining, and the merge takes the heat off Ethereum. It cuts Ethereum’s energy consumption by over 99%. That’s the equivalent of a country the size of Chile switching off its power completely.
• It paves the way for more improvements. This is a big step on a bigger journey for ETH. Next comes something called Sharding, which will make the network more scalable and lower gas fees. However, that won’t happen until next year at the earliest.
• ETH staking is here. Not only could the switch (along with other upgrades) eventually make Ethereum deflationary — meaning the number of tokens in circulation may decrease rather than increase, but investors will be able to stake their ETH and earn rewards.
  

  Ethereum Post-Merge: Down 18.5% in 3 Days

  It’s been a great week for Ethereum—and yet one of the worst in a while for ETH.

  Despite the success on Thursday of Ethereum’s much-anticipated merge, which saw the network flawlessly transition to proof of stake, the network’s native cryptocurrency, ETH, has plummeted some 18.5% in the last three days alone, to $1,419.07 at writing.

  ETH is down 5.6% today, hitting a low of $1,416.57 early Friday afternoon. The second-largest cryptocurrency by market capitalization appears close to breaching $1,400, a low not seen since late July.

  The week started on a much different note for ETH, which, flying high on lofty expectations for the merge, briefly surpassed $1,780 in value on Sunday.

  Two events likely changed that trajectory.

  On Tuesday, the U.S. Bureau of Labor Statistics released its latest Consumer Price Index (CPI) figures, which indicated the stubborn persistence of high inflation into August. The news—which will likely lead to the Fed once again raising interest rates to combat inflation—immediately triggered a massive sell-off in the stock market, and a corresponding drop in the value of cryptocurrencies, including Bitcoin and Ethereum.

  Off the CPI news, ETH’s value fell 8.9% in a matter of minutes on Tuesday, to $1.584.25.

  Two days later, on early Thursday, the merge executed flawlessly, successfully ushering in Ethereum’s proof-of-stake era and forever changing both the way ETH is created and how transactions on the Ethereum network are validated. Ethereum has now done away with the energy-intensive process of crypto mining on its network, and instead introduced “staking”—which incentivizes ETH holders to pledge their assets to the network in exchange for passive yield.

  Despite the event’s success, ETH’s price almost immediately began to plummet shortly thereafter. In the hours following the merge, ETH dropped another 8%, to $1,485.

  Why? Some drop in ETH’s price was anticipated following the merge. ETH futures and options backwardation indicated, going into the event, that traders were preparing to “buy the rumor, and sell the news” of the merge, according to data from Glassnode in early August.

  The tactic, common in financial markets, refers to the act of buying an asset as hype pushes its price upwards in anticipation of a major event that could increase its value, then selling it off as soon as the event occurs, to make away with short-term gains.

  Indeed, traders liquidated over $127 million worth of ETH in the hours following the merge, driving the cryptocurrency’s value downward. While some of that activity was expected, the degree of the sell-off could have been further accelerated by SEC chair Gary Gensler’s statement on Thursday that proof-of-stake cryptocurrencies like ETH could be considered and regulated as securities.

  While in the short term, ETH’s value appears to have been negatively impacted by the merge, Ethereum’s transition to a more environmentally-friendly consensus mechanism has also attracted the interest of traditional financial institutions.

  On Monday, Bank of America released a research note indicating that the security and energy efficiency of Ethereum’s new staking model could soon attract the interest of major institutional investors.

  Should you buy?

  Cryptocurrency is a risky and volatile asset and there are no guarantees about how it will perform. If you’re considering buying crypto, whether it is Ethereum or another project, make sure you understand the risks, and only spend money you can afford to lose. Ideally, only invest a small percentage of your portfolio into crypto and put the rest into other assets such as stocks, real estate, or bonds.

  Some may see the volatility around the merge as a great opportunity to buy Ethereum. If you’re in that camp, first make sure you are on top of other financial goals such as your emergency fund and retirement contributions. It is very early days for the crypto industry and it’s important to weigh the advantages of getting in early against the potential risks of a complete crypto collapse.

  Ethereum is second only to Bitcoin (BTC) in terms of its market cap, and is way ahead of other crypto ecosystems in terms of the amount of money locked on its blockchain. According to DeFi Llama, Ethereum accounts for almost 60% of the value locked on all blockchain networks. The challenge is that other blockchains are taking market share because Ethereum still struggles with network congestion and high gas fees.

  Ethereum could be a good long-term option, and it is certainly less risky than other small cap cryptos. But if it can’t reduce congestion and fees quickly, newer cryptos could take its crown. Earlier this year, an analyst at JPMorgan warned that Ethereum’s upgrades may come too late. Try to understand the potential pitfalls before jumping in.