Another Bitcoin and Crypto Crash? Blame it on Ethereum and Merge

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 to validate new coins and be compensated with extra coins for doing so.

The benefits of The Merge included 99% less energy consumption and with it the possibility that Ethereum usage could increase – and maybe even overtake Bitcoin one day. However, as of this writing, Ethereum is down over 8% in just 24 hours, and the rest of the crypto market is following suit. Here’s what you need to know…

• What happened? After The Merge, Ethereum’s price has fallen from a peak of $1,639 to a price of $1,317. In the last 24 hours alone, ETH is down over 8% as of this writing.
• But wasn’t The Merge meant to be a good thing? Yes. And from a technical and environmental perspective, it still is. The change in the validation process will save 99% of Ethereum’s energy usage before merging.
• So why is The Merge driving ETH and other cryptos down then? Due to comments made by Securities and Exchange Commission Chairman Gary Gensler. As The Wall Street Journal reports, Gensler said Thursday that cryptocurrencies that allow their holders to validate coins through a staking model could mean they meet a requirement in the so-called Howey test, which could then classify the crypto as a value.
• What exactly did the SEC chairman say? “From the perspective of the coin . . . it is 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 specifically referring to Ethereum, but rather 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 that determines whether something should be considered a security. In short, if an asset passes the Howey test and is considered a security, it must be regulated. The test gets its name from a US Supreme Court case. Investopedia has a great overview of the Howey test specs here. Common securities include assets such as stocks.
• Why would The Merge make Ethereum pass the Howey test? Because a proof-of-stake system sees ETH owners as essentially lending out their existing coins and doing extra work in return for possible profit. It is an important calculation for whether something passes the Howey test.
• So if Ethereum passes the Howey test now, what does that mean? If Ethereum is judged to have passed the Howey test, it would make ETH a security, necessitating regulation, most likely by the SEC.
• So why does that possibility cause Ethereum to crash? Because crypto is like the wild west and crypto investors are extremely wary of any form of government regulation. Just the threat of regulation is likely to cause some investors to sell their coins, thereby reducing the prices of ETH and other cryptos as well.
• Is Ethereum the only crypto that uses proof-of-stake? No, so do Solana and Cardano. Solana is currently down almost 6% in the last 24 hours, as of this writing, and Cardano is down almost 7.5%.