On Sept. 15, Ethereum (ETH +0.60%) will celebrate the one-year anniversary of The Merge -- a technological tour de force that was easily one of the most hyped and anticipated events of 2022 for the crypto market. One year ago, investors salivated at the thought of what impact The Merge might have on Ethereum's future price.
But guess what? Ethereum is still trading under $1,650, at almost exactly the same price that it was 12 months ago. This raises an interesting question: What exactly have we learned from Ethereum and The Merge? And how can those lessons be applied when evaluating other cryptocurrencies? Let's take a closer look.
Tech upgrades
Perhaps the biggest lesson here is that tech upgrades, no matter how big, do not always lead to huge price increases. This is an important point to keep in mind, based on how much hype many of these tech upgrades get. They are usually presented as major catalysts capable of sending a crypto soaring. But the truth might be quite different.
Image source: Getty Images.
What's interesting in the case of Ethereum is that The Merge was a truly transformational change and theoretically should have had a dramatic impact on Ethereum's price. The Merge transformed Ethereum from an old, energy-intensive, proof-of-work blockchain into a modern, energy-efficient, proof-of-stake blockchain. So, The Merge was a very different type of event than a typical annual upgrade that many blockchains undergo, and yet it still didn't have an appreciable impact on Ethereum's price.
From my perspective, it means that the "tech upgrade = growth catalyst" investment thesis is no longer useful for evaluating cryptocurrencies. Going forward, you can pretty much assume that either the market is going to price in these upgrades as they are announced or the market is going to ignore the upgrade entirely. So, trying to time your investment decisions around key upgrades is not likely to be an effective strategy.
Regulatory risk
The second big lesson from The Merge is that new business models can lead to new regulatory headaches. As soon as Ethereum became a proof-of-stake blockchain, it meant that there was going to be much more of a focus on crypto staking, which is the process of "locking up" your crypto in exchange for a financial reward. Until The Merge, crypto staking was a sleepy backwater of the crypto industry. But after The Merge, everyone was trying to figure out how to capture those financial rewards.
And that included, unfortunately, the Securities and Exchange Commission (SEC). From the perspective of SEC chairman Gary Gensler, new crypto-staking products sounded a lot like securities, and he vowed to take a closer look. In February, the SEC ended up going after cryptocurrency exchange Kraken for its crypto-staking activities, and that immediately got the attention of the market. Right now, Coinbase Global (COIN +1.94%) is locked in an epic battle with the SEC over the future of crypto staking.
If you parse through all the filings, documents, and back-and-forth between market participants and regulatory authorities, it sounds a lot like the SEC is not so much opposed to the concept of staking as it is to the way staking is marketed to retail investors, who might think it's a no-brainer, no-risk guaranteed return of some kind. But still, if you're an investor in Ethereum, you have to be aware that some regulatory risk does exist here, and it was all brought about by a change in business model (i.e., the shift from mining to staking).
Macroeconomic outlook
The third big lesson is that the macroeconomic outlook matters more for crypto than many of us would like to admit. Gone are the days when the crypto market was completely separate from traditional, mainstream financial markets. With a surge of new institutional money into crypto comes a surge of institutional thinking about the crypto market. And that means a 24/7 obsession with the macroeconomic outlook.
CRYPTO: ETH
Key Data Points
Thus, while 2023 should have been all about the new era of Ethereum 2.0, it has instead been all about regional bank crises, Federal Reserve policy, jobs data, and inflation data. Long story short, there is absolutely no way Ethereum is going to skyrocket in price if banks are failing, inflation is surging, and economic growth is anemic. This completely changes the game for many crypto investors, who need to take a much more holistic view of the financial markets into account when choosing where to invest.
A framework for analyzing cryptocurrencies
Taken together, these three lessons can offer the basic framework for evaluating just about any cryptocurrency. First, make sure you understand the underlying business model of a crypto. Next, layer in some macroeconomic analysis, with a focus on key events or metrics that are being watched by the biggest institutional investors. And only then can you start to focus on all the interesting features of a new tech upgrade. In short, the tech upgrade is just the cherry on top of the final dessert, not the main course.
And Ethereum? I'm still bullish on this crypto, even if it hasn't taken off the way it was supposed to one year ago. It's still up 35% for the year, and recent developments seem to suggest that institutional investors are adding to their Ethereum positions. But I'm not trying to time the market around new tech upgrades. Instead, I'm investing in Ethereum because I have confidence in its long-term growth prospects.
