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The price of Ethereum (ETH) fell after the network completed its famous, long-anticipated upgrade, known as the merge.
Despite the successful merge that switches the Ethereum network from an energy-intensive proof-of-work consensus mechanism to proof of stake, the leading altcoin dropped more than 7% below its $1,500 threshold.
Experts expected a bit of decline in Ethereum’s price following its long-awaited merge. ETH is also moving in tandem with traditional markets, particularly the Nasdaq Composite.
But crypto enthusiasts remain positive about Ethereum’s prospects post-merge.
“Nothing fundamentally has changed for Ethereum. If any, the post-merge ecosystem is now better placed in terms of energy efficiency, decentralization and growth, further entrenching its positioning as the dominant layer 1 blockchain,” says Daniel Dizon, CEO, and co-founder of Swell Network.
Cryptos like Ethereum are risk-on assets, subject to volatility when inflation persists. The Federal Reserve, which is trying to reign in inflation, has made it clear that the prioritization is focused on fighting inflation before attempting a soft landing.
Recent inflation figures have heightened investors’ fears that the Fed will likely raise higher rates at the Sept. 20-21 meeting.
By hiking rates further, the Fed will strengthen the U.S. dollar, taking more liquidity out of the market. With less liquidity, riskier assets like tech stocks, growth stocks, and cryptocurrencies could see price declines as investors tighten their spending.
Crypto market experts say there hasn’t been much institutional investing in the crypto markets amid higher inflation and less liquidity except for Ethereum. There’s been a lot of excitement around Ethereum’s merge and what it brings to the Web 3.0 space.
“We expect this decoupling move (of Ethereum) to continue in the near term as investors digest the long-term implications of the merge, such as improved energy efficiency, the rise of the staking economy, and ETH becoming potentially deflationary,” Dizon says.
According to Ben McMillan, co-founder and chief investment officer of IDX Digital Assets, around 11% of all circulating ETH are already staked. “This means it takes comparatively less selling pressure to drive down the price,” he says.
As of this writing, Ethereum is down more than 21% month over month, and Bitcoin is down about 18% over the same period.
The total cryptocurrency market cap is hovering around $1 trillion.
It’s hard to say whether Ethereum has truly bottomed out yet or not. In addition to immediate price pressures post-merge and the Fed, other factors could be driving a wider downward trend for Ethereum.
Ethereum’s most recent bottom of $880 was reached on June 18. The cryptocurrency has gone up and down since then, with the most recent high of just more than $2,000 coming in mid-August. But that’s still 58% off its all-time high from November 2021.
Despite the ups and downs, Rodrigo Batista, CEO, and founder of Digitra.com crypto exchange says he’s extremely bullish on Ethereum.
He says we could see the cryptocurrency at $2,500 by late 2022. However, he warns that macro-headwinds like inflation and the U.S. government cracking down on the crypto space could knock down ETH’s price.
But not all crypto enthusiasts see it that way.
McMillan says that “a lot of institutional investors are looking at some of the pending regulation as a good sign that the asset class is starting to mature past its ‘Wild West’ days.”
The U.S. is still deciding whether cryptocurrencies are securities, commodities, or something else entirely.
The eventual decision about cryptocurrencies’ status will affect how they’re regulated and who regulates them.
At a time, investors believed cryptocurrencies could be considered a hedge against inflation, but this hasn’t proven to be the case. Cryptocurrencies have begun moving in tandem with riskier asset classes like growth stocks and the tech-heavy Nasdaq.
In other words, investors may flee crypto for traditionally safer assets like gold, oil, and real estate during times of higher inflation. None of that bodes well for Ethereum’s short-term price potential.
Ethereum got off to a rough start in 2022. After recording record highs of more than $4,800 in November 2021.
Some of this downward pressure has certainly resulted from investors correlating Ethereum and other cryptocurrencies with riskier tech stocks, which have seen a great deal of downward momentum this year.
“This results from the market trying to make sense of a new technology,” Batista says. Cryptocurrencies now suffer “from regular market pressures,” he adds. When the broader market is down, cryptocurrencies follow suit.
Like all cryptocurrencies, Ethereum is a high-risk investment. After an all-time high approaching over $4,800 in November 2021, Ethereum has declined nearly 69%.
High-risk investments can see tremendous price swings and extreme volatility. However, even compared with the tech-heavy Nasdaq, which is full of high-risk growth stocks.
As a relatively new asset class, nobody knows what the future holds for cryptocurrencies as investment vehicles. Predicting their price moves is very challenging.
Cryptocurrencies are also subject to hacks and future regulations, which may affect their overall value.
If an investor chooses to invest in Ethereum, they should consult a financial advisor first and never invest more than they can afford to lose.
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