The NCI closed Sunday (09/18/22) 13.4% below last week’s closing. The index’s negative performance was influenced by ether (ETH), down 22.1%, while bitcoin (BTC) fell 9%.
Crypto markets came into the new week still bolstered by Merge enthusiasm and BTC’s surprising late week rally. ETH spent its last Monday as a PoW protocol on a slight downtrend as trading volume slowly grew as The Merge neared.
While ETH investors prepared for their transition into a new, more sustainable consensus mechanism, BTC prices plateaued after recovering from a short-lived dip as investors braced for another US inflation reading that could corroborate or refute the stern warning issued by Fed Chairman Jay Powell in the previous week.
On Tuesday, August’s 8.3% CPI reading surpassed market expectations, despite a steep drop in gas prices. Shelter and food were the primary culprits, moving headline inflation slightly away from neutral territory (0.1%) and increasing core inflation to 0.6%, both on a monthly basis.
As a result of August’s stubborn inflation figures, all risk assets took a hit and the CME FedWatch Tool began forecasting the outside probability of a 100 bp (instead of 50 bp) hike at the upcoming FOMC meeting. BTC prices took a 11.4% dive all the way to $20,100 during US trading hours. ETH prices were slightly more resilient as a result of The Merge’s imminence, but still dropped by 8.4%, to just under $1,600.
On Wednesday, ETH investors placed their final bets after evaluating the latest developments related to Merge risks.
The Merge was fully implemented Thursday as the first block was produced by PoS validators (our research team’s breakdown of this moment can be found here). Overall, the transition to a new consensus mechanism occurred without a hitch.
Those who were expecting a surge in ETH prices as a result of a successful Merge were sorely disappointed, as prices dropped by nearly $100 (9%) in the hours immediately following the transition to PoS. BTC also registered a slight drop alongside traditional markets.
ETH’s steep price drop was likely a reflection of investors selling their positions as The Merge entered the rearview mirror and the promise of a short-term price catalyst evaporated.
The lack of a rally after The Merge’s success is also indicative that the market saw little risk of technical on-chain problems that could compromise blockchain functionality. In other words, by the time it was announced, The Merge’s success was largely a foregone conclusion.
Crypto markets traded flat for the remainder of the week before slumping in the last hours of Sunday to cap off a disappointing week.
US Securities and Exchange Commission Chair Gary Gensler noted in a Wall Street Journal interview Thursday that Ethereum’s transition to PoS made it more similar to a security than a commodity. According to Gensler, staking services implied “the investing public is anticipating profits based on the efforts of others,” which is a key characteristic of a security, according to the Howey Test. This distinction is relevant because securities are subject to a greater degree of oversight and scrutiny by US regulators.
This debate is likely to remain unresolved until the US Congress approves legislation that establishes a framework to classify crypto assets and clearly define their appropriate regulatory authority. Some observers believe Chair Gensler seems to be of the mind that bitcoin alone could be classified as a commodity.
All eyes are on the FOMC’s interest rate announcement on Wednesday, the same day when the Bank of Japan and the Bank of England will divulge their own respective rate hikes. CME’s FedWatch tool is currently forecasting an 84% chance of a 75 bp rate hike, but last week’s greater-than-expected CPI reading has left some investors considering the possibility of a 100 bp increase.
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