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Another Bitcoin and crypto crash? Blame Ethereum and Merge

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The biggest news in crypto last week was “The Merge”, the name for Ethereum’s transition from a proof-of-work validation process, where people mine crypto using computers, to a proof-of-stake validation process, where crypto owners use their current ETH coins as collateral for validating new coins and are compensated for this with additional coins.

The benefits of The Merge included 99% less energy consumption and with it the possibility that Ethereum usage would soar – and maybe even catch up with Bitcoin one day. But at the time of writing, Ethereum is down more than 8% in just 24 hours, with the rest of the crypto market following. Here’s what you need to know:

  • What happened? After The Merge, the price of Ethereum has fallen from a high of $1,639 to a price of $1,317. In the past 24 hours alone, ETH is down more than 8% at the time of writing.
  • But shouldn’t The Merge be something good? Yes. And from a technical and environmental point of view it still is. The switch in the validation process saves 99% of Ethereum’s energy consumption before the merge.
  • So, why is The Merge driving ETH and other cryptos down? Due to comments from Gary Gensler, chairman of the Securities and Exchange Commission. as the Wall Street Journal reportsGensler said on Thursday that cryptocurrencies that allow their holders to validate coins through a betting model could mean meeting a requirement of the so-called Howey test, which could then classify the crypto as a security.
  • What exactly did the SEC chairman say? “From the perspective of the currency . . . that’s another indication that under the Howey test, the investing public expects profits based on the efforts of others. Keep in mind that when he referred to “the perspective of the coin”, he was not referring specifically to Ethereum, but to any crypto that uses a proof-of-stake validation system. Yet Ethereum now falls into that category.
  • What is the Howey Test? It is a framework that has been in use for over 70 years and that determines whether something should be considered a security. Basically, if an asset passes the Howey test and is considered an effect, it must be regulated. The test gets its name from a US Supreme Court case. Investopedia has a good overview of the Howey test specifications here. Common securities include assets such as stocks.
  • Why would The Merge make Ethereum pass the Howey test? Because a proof-of-stake system is essentially lending ETH owners their existing coins and doing extra work in exchange for potential profits. That’s an important measure of whether something passes the Howey test.
  • And if Ethereum now passes the Howey test, what does that mean? If Ethereum is judged to have passed the Howey test, it would make ETH a security, which would require regulation, most likely by the SEC.
  • So, why does that possibility cause Ethereum to crash? Because crypto is the Wild West and crypto investors are extremely wary of any kind of government regulation. The threat of regulation alone will prompt some investors to sell their coins, causing the price of ETH and other cryptos to fall as well.
  • Is Ethereum the only cryptocurrency using proof-of-stake? No, Solana and Cardano too. Solana is currently down nearly 6% in the last 24 hours, as of this writing, and Cardano is down nearly 7.5%.

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