What do the Ethereum merger and next week’s Federal Reserve meeting have in common?
For starters, both are likely to shake up the crypto market, adding another wave of volatility to bitcoin and ethereum prices. In fact, that may be all they have in common.
The Ethereum merger took place on Thursday, completing one of the biggest events in crypto to date. This should make the currency more climate-friendly, but it comes with significant risks, which have major implications for investors. The token has already been on shaky ground, swinging up and down over the past two weeks. More recently, the Ethereum token, called Ether, fell after Labor Day, surged above $1,600 mid-week and fell back below that figure on Tuesday afternoon. Ether has oscillated between and outside this threshold since then.
Bitcoin prices have turned similarly. The token saw steep declines earlier this week following the release of the latest consumer price index, which showed inflation rising slightly month-on-month. On Tuesday, bitcoin slipped below $21,000 and continued to fall, eventually falling below $20,000 — a key price for the token. It has barely risen above this threshold since Thursday morning. This price drop ends last week’s rally after a three-month low for the token.
The stock market experienced a similar fall following the CPI release, and the crypto market has increasingly followed the stock market in recent months. Experts were anticipating a slight drop in inflation in August, but prices instead rose 0.1% month-on-month. The crypto market is very sensitive to these inflationary pressures, as the Federal Reserve raises interest rates in response to inflation. And with that comes important (and also “necessary,” according to Fed Chairman Jerome Powell) for the economy.
“Bitcoin is in the crosshairs amid frenzied selling pressure as CPI data has clouded any hopes of moderation from the Fed in its efforts to rein in inflation,” according to Bitfinex Market Analysts, a cryptocurrency exchange based in the British Virgin Islands. “Battled high-growth tech stocks continue to be a proxy for bitcoin amid steep falls across the Nasdaq. As a nascent market built on new technologies, the cryptocurrency space finds itself exceptionally vulnerable to the bearish sentiment that is sweeping financial markets.
With two major events in a row, crypto is in for a big week –– for better or for worse. Here’s what investors can expect.
How the Ethereum Merger Will Introduce New Volatility to the Crypto Market
The Ethereum merger was highly anticipated in the crypto community, and it was finally completed in the early hours of Thursday morning. Whether this will increase the price of Ether or reduce it in the long term is pure speculation at this point. After initially holding steady, Ethereum fell below $1,500 on Thursday morning.
It’s called “the merger” because Ethereum will move from what’s called “proof of work” to “proof of stake” through the merging of two blockchains. The change could reduce Ethereum’s electricity costs by around 99.95%, according to the Ethereum Foundation.
There are significant risks associated with the merger, however, and this is how the event could introduce further volatility into Ether prices. Among other concerns, unforeseen bugs in the blockchain could cause outages, which could lead to significant price drops. Some experts believe that much of the risk is already priced in, in which case potential price declines won’t be as severe.
“Sentiment toward the event was overshadowed by larger global macroeconomic forces,” Kruger said. “But overall, we think most of the event risk around the merger has been priced in, tipping the balance of risk to the downside immediately after a sell-type reaction does.”
Ether’s price is down over 40% since the start of this year, selling near $4,000 in January for a price range of $1,500 to $1,600 today. Some investors are hoping for rallies above $10,000 post-merger, but others are still feeling quite critical and dubious.
How the Fed Meeting Could Introduce New Volatility to the Crypto Market
The Fed is essentially trying to cool the economy in order to curb rising prices. Among other things, the slowing economy is expected to lead to lower corporate earnings and lower investor confidence, leading to further risk aversion in the market. All of this has the effect of driving down crypto prices.
We have seen this pattern repeat itself several times this year. When the Fed announced its third rate hike of 0.75 percentage points in June, the price of bitcoin fell from over $22,000 to under $17,500. A similar but smaller drop occurred in July when the Fed again raised rates by the same amount; Bitcoin price fell 5%. Experts generally agree on this relationship between inflationary pressures, Fed rate hikes, and crypto prices.
“There is no doubt that the CPI report has triggered a spillover into risk assets and crypto markets by extension,” said Joel Kruger, market strategist at LMAX Group, a London-based fintech company that operates currency and crypto exchanges. “Given the correlation between things and given this latest inflation data, we expect more downward pressure on crypto as investors are forced to face the reality of a policy higher monetary policy for longer which weighs on growth prospects and weighs on sentiment. “
In fact, the crypto market has been so sensitive to Fed actions that crypto plummeted in late August when Powell made hawkish statements at an economic summit (not an official Fed meeting). With the latest CPI numbers, another rate hike next week is all but confirmed.
But will bitcoin and ethereum continue to be affected by further increases? Experts believe so.
Kruger said he expects bitcoin and ethereum prices to suffer from continued Fed rate hikes, “because many market participants still view crypto assets as tied to sentiment. of global risk, which is negatively affected as rates rise”.
How should crypto investors react to the Ethereum merger and Fed rate hikes?
The merger and the Fed meeting next week have the potential to send crypto prices crashing this month. It’s a risky month for Ethereum in particular, as the negative impact from the Fed and the merger could prove to be a double whammy.
The market is particularly volatile at the moment as inflation numbers send crypto and stock prices plummeting ahead of another likely rate hike next week at the Fed meeting. Experts say you should stay the course with your long-term investments and avoid selling your assets in a panic spree right now, especially as some experts predict even steeper declines in the near future.
“We believe bitcoin should ultimately be used as a direction indicator in the broader crypto market,” Kruger said. “That said, we expect there is still potential for another healthy decline, perhaps into the $10,000 area, before the market finally gets supported ahead of the next big run to a new low. test and a possible breaking of the record of the end of 2021.
One thing is certain: if the last two years have taught us anything, it is that crypto prices are very volatile and difficult to predict. Market volatility makes bitcoin and ethereum risky assets, and they become more volatile during times of economic uncertainty.
This is why investment experts recommend devoting no more than 5% of your portfolio to crypto and investing only what you would be willing to lose. As with any investment, experts say it’s best to invest for the long term, no matter what’s happening in the market today.