What happened
The world's second largest cryptocurrency, Ethereum (ETH -0.68%), has successfully undergone a complete network transformation, potentially landing it in regulators' crosshairs. And this might be why Ethereum is down 2.5% over the past 24 hours as of 11:30 a.m. ET on Friday.
Ethereum's network transformation has caused volatility for other cryptocurrencies, including Ethereum Classic (ETC 2.58%) and Ravencoin (RVN 1.93%). Both have more than doubled in value over the past three months, making them anomalies in the cryptocurrency space at the moment.
However, now that Ethereum's event is complete, holders of Ethereum Classic and Ravencoin appear to be taking some profits off the table. These two were down 8% and 14%, respectively, as of this writing.
So what
Ever since Ethereum launched in 2015 as a proof-of-work blockchain (more on that in a moment), developers had talked of the day when it would transition and become a proof-of-stake blockchain. After years filled with talk and delays, it seemed the day would never come. But the day finally came yesterday, Sept. 15.
This transition is called The Merge, and so far, everything seems to be running smoothly -- music to anyone involved. But an external problem has emerged from The Merge: Gary Gensler, chairman of the Securities and Exchange Commission (SEC), said that Ethereum might be accurately labeled as a security now, instead of a commodity, according to a report from The Wall Street Journal.
For the record, if the SEC was to regulate Ethereum as a security, the same thing would apply to the many proof-of-stake blockchains, not just Ethereum. But whether or not Gensler's comments ultimately result in regulation, this much is for sure: It's enough to spook at least some holders of Ethereum, and it's a contributing factor for why it is down today.
Ethereum Classic and Ravencoin would presumably be exempt from Gensler's scrutiny because they're proof-of-work blockchains. But these two cryptocurrencies are also moving because of The Merge. Ethereum functions in a fundamentally different way now than it did before. And some of the underlying infrastructure is jumping to other blockchains.
With proof of work, small-scale Ethereum miners could earn tokens by voluntarily contributing computing power to the network. And it didn't have to be much; miners could get started with minimal investment.
But with proof of stake, miners need to stake at least 32 tokens, worth over $46,000 as of this writing. That's cost-prohibitive for some, leaving small-scale miners on the outside looking in.
Rather than let their mining rigs collect dust, Ethereum miners are jumping over to Ethereum Classic and Ravencoin, among others. For context, mining power is measured in a network's hash rate. For Ravencoin, the hash rate has regularly been below three tera-hashes per second (TH/s) since May. However, over the past three days, the hash rate of Ravencoin has jumped from about 5 TH/s to over 15 TH/s as of this writing, according to data from CoinWarz, a website that calculates mining profits.
The same is true of Ethereum Classic. Its hash rate has regularly been around 20 TH/s for six months. Today, it is over 200 TH/s, also according to CoinWarz.
The jump in the hash rates of Ethereum Classic and Ravencoin was widely anticipated, and so investors began piling into these two cryptocurrencies months ago. In theory, having a higher hash rate makes Ethereum Classic and Ravencoin more secure, which could instill confidence in the network and spur user adoption.
Investors months ago were trying to get in before adoption increased -- a smart strategy. But it seems that now that The Merge is complete, some of these past buyers are sellers today, gladly locking in their recent gains.
Now what
As for cryptocurrency regulation, I have no idea what Ethereum investors should expect. President Joe Biden has just released a framework for cryptocurrency regulations. But the legislative branch could still take a different path from these executive branch suggestions. It's anyone's guess whether the SEC will ever officially regulate Ethereum as a security.
Regarding Ethereum Classic and Ravencoin, there's something investors should consider. The economics of cryptocurrency mining get more difficult with greater mining competition. By some estimates, mining Ethereum Classic and Ravencoin is already unprofitable because miners pay more for the electricity than the cryptocurrencies are worth.
If Ethereum Classic and Ravencoin keep going down in value, as they are today, it would only be a matter of time before miners stopped. This would cause the respective hash rates to fall, potentially sapping some of the user confidence necessary for long-term adoption.
In conclusion, I'd say Ethereum Classic and Ravencoin would counterintuitively get less risky as an investment the more they go up in value, and vice versa. Therefore, coin prices and miner profitability are two things to watch with these two cryptocurrencies.
