What The Merge Means For Investors

Key takeaways

• Ethereum completed its first successful test merger for a long-awaited software transition on Wednesday
• The entire Ethereum network is expected to officially transition in August
• Investors and developers are optimistic about Ethereum’s future despite native coin ether being down 50% YTD
• Some analysts predict that ether could hit $2,000 over the weekend as investors applaud the successful test

If you’re not big into crypto, you probably haven’t heard that the Ethereum network has struggled to switch from a proof-of-work to a proof-of-stake concept for several years now (let alone what either of those are).

But if you are big into crypto, you may have heard whispers about the blockchain’s historic transition in the works. And this past Wednesday, Ethereum took a giant leap forward on its journey to becoming a leaner, cleaner altcoin.

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Ether’s current performance

Ether (Ethereum’s native token) had a banner 2021, leaping from $775 to $3,768 in the course of a year. But since then, the crypto has plunged dramatically, currently resting around $1,800 a token.

Admittedly, ether’s sudden decline isn’t exactly its fault, and the token certainly isn’t alone in its misery. The entire crypto market has shed a cool $1 trillion this year alone. Causes range from crypto’s inherent volatility (especially following last year’s insane rallies) to heightened risk atop the Russia-Ukraine war.

Additionally, skyrocketing inflation and spiking interest rates have sent many investors scurrying to less-risky assets. The general increase in crypto investing over the past two years may have also contributed to surging volatility as fresh faces tangle with crypto’s sudden mood swings.

That said, Ethereum in particular has also grappled with anticipation—and repeated disappointments—surrounding its impending software upgrade. Known as “the Merge,” it finally happened this week… at least, the first step did.

Ethereum’s big news

Cryptocurrencies and altcoins are often criticized for their time- and energy-intensive operations. Many still rely on “proof-of-work” models that require an army of machines to solve intricate math problems. In the process, the proof-of-work process “mints” new coins and confirms transactions on the blockchain.

Relying on such an enormous network of energy intensive hardware produces astronomical amounts of carbon emissions (according to one estimate, Bitcoin mining devours the same amount of energy annually as the Netherlands did in 2019).

In recent years, Ethereum has pushed to move to a cleaner, more efficient mining process known as “proof-of-stake.” In this model, token holders can “stake” their own coins on the blockchain to verify transactions and mint new tokens. The process is both greener (Ethereum stands to slash emissions by 99%) and produces faster, cheaper transactions.

But switching an entire blockchain network from one system to another doesn’t happen overnight. Developers and coders have chipped away at this problem for years, battling hurdles and bugs along the way.

But on Wednesday, 8 June, Ethereum developers ran the first of three major tests prior to completing the Merge—and the network passed with (mostly) flying colors.

A successful test(net)

Since December 2020, Ethereum developers have tinkered with “the beacon,” an Ethereum chain that operates alongside the existing blockchain. The beacon provides a place for developers to build, test and tweak the proposed proof-of-stake system without impacting the rest of the blockchain.

So far, developers have simulated the upcoming Merge by combining testnets (test networks) that simulate Ethereum’s main network (mainnet) with the beacon. These tests give developers an opportunity to see how the code handles in a live environment.

But this past Wednesday, Ethereum developers hit a new milestone: They successfully merged Ethereum’s longest running testnet, “Ropsten,” with the beacon chain. This makes Ropsten the first testnet to undergo a full merger, and its success will allow developers to study the new proof-of-stake system for several weeks to ensure operations continue running smoothly.

Upcoming changes

Wednesday’s test exercise is the first concrete proof that Ethereum can switch to proof-of-stake validation with minimal issues. Though developers caught a few minor bugs, the consensus is that the current problems will be easily addressed. Still, Ethereum developers plan to run at least two more full mergers before “the” Merge.

As a result of the test’s success, Vitalik Buterin, one of Ethereum’s co-founders, informed the community that stakeholders may see the Merge go live as early as August 2022.

Up next: Ethereum halving

But the technical aspects of the Merge aren’t the only ones that stakeholders should concern themselves with. Assuming that the transition doesn’t experience yet another delay, investors can also expect the switch to dramatically impact the value of their portfolios.

But why?

Because the Merge will push Ethereum miners out of business in favor of stakeholders, new ether coins will issue at far slower rates we currently see. The upgrade also involves reducing the supply of ether via “burning,” the removal of coins from circulation. The burning will put deflationary pressure on the network and likely cause token prices to rise.

Additionally, an anticipated change to the minting process has been referred to as “Ethereum halving” or “triple halving.” This will limit new Ethereum supply as the number of coins produced per validation is reduced. While the process is similar to bitcoin halving, it’s expected to be the equivalent of three bitcoin halvings, thus the name.

High potential, wary markets

Many in the crypto community eagerly await the official Merge. However, ether’s price remains surprisingly low compared to its potential gains following the expected Merge.

So, what gives?

For one, many investors remain wary that the Merge won’t actually happen on the anticipated date. Though the testnet run was successful, Ethereum’s transition to proof-of-stake has been delayed multiple times across several years.

There are also some questions about how investors and companies who’ve built tech on the existing blockchain will respond to changes. If the move impacts their livelihoods, it’s possible that ether will suffer as collateral damage.

Still, many bullish analysts predict that ether could see prices as high as $2,000 over the weekend as more investors get wind of the test’s success. And if enough investors hop on the bull train, positive investor sentiment could see ether recover more of its lost gains in the coming weeks.

What this means for you

Cryptocurrency is a notoriously volatile asset class, and when the market doesn’t jump on good news immediately, it’s tempting to bet big and hope it will pay off when investors hop on the bandwagon.

However, even—or perhaps, especially—in the crypto markets, attempting to time the market is a bad idea. Aside from the regular risks and the fact that many market timers lose more than they gain, crypto isn’t shackled by regular trading hours. As such, tokens are traded 24/7 around the world, meaning that there are more opportunities than ever to miss a big swing and lose your investment.

Crypto enthusiasts should also be wary of pouring too much money into a single crypto, regardless of current prices or news. Like investing in stocks, bonds and ETFs, experts often advise diversifying your crypto holdings to catch a broader range of upsides while spreading the risk of downturns.

And while many investors will be tempted to go all in—or completely cash out—ahead of Ethereum’s Merge, here, too, it’s best to take the long-term approach with your investments.

Balance crypto risk and reward with Q.ai

Even in the investment markets, betting on cryptocurrencies remains a bit of a gamble. These novel tokens have a lot of hype—and they promote a lot of confusion regarding their value, potential and complexities.

All that to say, we don’t blame you if you’re a bit lost when it comes to cryptos, from their actual value to whether (and where) you should invest.

Fortunately, Q.ai makes it easy with our AI-backed Crypto Kit. Thanks to the technical and analytical prowess of artificial intelligence, our AI can handle the selection, trading and management of crypto assets.

So, whatever is happening with Ethereum now, and whatever will happen when the next coin gets its 15 minutes of fame, our Crypto Kit has you covered.

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