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 being compensated with additional coins for doing so.
The benefits of The Merge included 99% less energy consumption and, with it, the possibility that Ethereum use may rise–and perhaps even overtake Bitcoin one day. Yet as of the time of this writing, Ethereum is down over 8% in just 24 hours, and the rest of the crypto market is following. Here’s what you need to know:
- What’s happened? After The Merge, Ethereum’s price has plummeted from a high of $1,639 to a price of $1,317. In the last 24 hours alone, ETH is down over 8% as of the time of this writing.
- But wasn’t The Merge supposed to be a good thing? Yes. And from a technical and environmental perspective, it still is. The switch in the validation process will save 99% of Ethereum’s pre-Merge energy usage.
- So, why is The Merge driving ETH and other cryptos down? Because of comments made by Securities and Exchange Commission Chairman Gary Gensler. As the Wall Street Journal reports, Gensler said on Thursday that cryptocurrencies that allow their holders to validate coins through a stake model could mean they meet a requirement of the so-called Howey test, which could then classify the crypto as a security.
- What did the SEC chairman say, exactly? “From the coin’s perspective . . . that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others.” Keep in mind, when he referenced “coin’s perspective,” he wasn’t specifically referring to Ethereum, but rather to any crypto that uses a proof-of-stake validation system. Still, Ethereum now falls into that category.
- What is the Howey test? It’s a framework that’s been in use for over 70 years that decides whether something should be considered a security. In short, if an asset passes the Howey test and is deemed a security, it must be regulated. The test gets its name from a U.S. Supreme Court case. Investopedia has a great rundown of the Howey test specifics here. Common securities include assets like stocks.
- Why would The Merge make Ethereum pass the Howey test? Because a proof-of-stake system sees ETH owners as essentially lending their existing coins and doing additional work in return for possible profits. That is an important metric in whether something passes the Howey test.
- And if Ethereum passes the Howey test now, what does that mean? If Ethereum is ruled as having passed the Howey test, it would make ETH a security, which would necessitate regulation, most likely by the SEC.
- So, why is that possibility making Ethereum crash? Because crypto is like the Wild West and crypto investors are extremely wary of any kind of government regulation. The mere threat of regulation is likely prompting some investors to sell their coins, thus driving down the price of ETH and other cryptos, too.
- Is Ethereum the only crypto that uses proof-of-stake? No, Solana and Cardano do, too. Solana is currently down almost 6% in the past 24 hours, as of the time of this writing, and Cardano is down nearly 7.5%.
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