Ether Cryptocurrency Falls After ‘Merge’ Software Upgrade

Markets have been falling around the world as the Federal Reserve and other central banks raise interest rates aggressively to combat rising inflation. Higher rates for safe debt usually make riskier assets less attractive to investors—and traders consider cryptocurrencies among the riskiest.

The Dow Jones Industrial Average fell into bear-market territory on Monday. Bitcoin is down 70% from its November record high.

In the months leading up to the merge, traders drove the price of ether up from under $1,000 in mid-June to almost $2,000 by mid-August.

The Ethereum merge abandoned the network’s “proof-of-work” model and the high-energy computers needed to run it, rendering the business practice of Ethereum miners obsolete.

Jeff Dorman, the chief investment officer at digital-asset investment firm Arca, said Ethereum’s former miners are likely contributing to the selloff. “Ethereum miners just had their entire livelihoods stripped,” he said, adding that what the miners are doing is cashing out what they built up before the merge.

Those miners aggressively stockpiled new ether over the past few months, knowing that after the merge their entire business model would be shut down, Mr. Dorman said. Their collective holdings rose from about 200,000 ETH on June 15 to about 263,000 ETH on Sept. 3, approximately $1.7 billion, according to data from blockchain analytics firm OKLink. That total dropped to about 242,000 ETH on Sept. 19.

Ethereum faces other issues beyond the miner selloff. While the software upgrade went off without any major problems, it couldn’t yet be determined whether it introduced any bugs. Ethereum software upgrades in 2019, 2020 and 2021 all resulted in bugs, said

FRNT Financial’s

CEO and co-founder

Stéphane Ouellette.

“The potential that the upgrade introduced vulnerabilities or bugs that may be exploited over the long term remains,” he said.

Another concern, at least for ardent crypto backers, is that the new version of Ethereum is less decentralized than the old version. Crypto networks such as those for ether and bitcoin are designed so that anybody can download the software and run it and become a “node” on the network. Ethereum is the network for ether.

In bitcoin and the old version of Ethereum, these nodes expended computing power as a cost of being allowed to operate on the network and earn a reward of newly minted cryptocurrency.

Ethereum moved to a proof-of-stake model, where validators put their crypto holdings on the line to verify transactions. As a result, validators now have control over a large portion of the network.

The merge also stirred up regulatory fears. Securities and Exchange Commission Chairman

Gary Gensler

told reporters earlier this month after a congressional hearing that Ethereum’s staking model, and the way it generates profits, could be an indication of an asset that fits the criteria of a security. If the SEC decides that Ethereum is a security, it would introduce a raft of regulations for the industry.

Write to Paul Vigna at [email protected]