Why Ethereum is Dropping After the Merge

In this photo illustration, an Ethereum logo seen displayed on an android smartphone. Credit – Avishek Das/SOPA Images/LightRocket via Getty Images

Last week was a celebratory one for Ethereum: the world’s second-largest blockchain successfully transitioned to Proof of Stake after a painstaking eight-year development process. (Read more here about the merge’s importance.) But on Monday, investors woke up to the token’s price at its lowest point since July. While Ethereum had climbed back to over $1700 in September, it’s now around $1330, amounting to more than a 20% drop.

If the merge was supposed to fix many of Ethereum’s problems, why is its value still tanking? Here are a few reasons for the current downturn.

The merge was designed to have a long-term impact, not a short-term one.

When Ethereum merged successfully, many of the responding headlines bordered on ecstatic: “Ethereum ‘merge’ will change crypto forever,” crowed Fortune. (This publication—and writer—were admittedly not immune to excitement.)

But while the developers of the merge promised many changes—including a sharp decrease in energy consumption and increased security—a short-term price increase was not one of them. The merge didn’t fix Ethereum’s high fees or congestion. Instead it merely laid the groundwork for further infrastructure that could solve its problems in the years to come. Anyone who hoped that Ethereum would look or run completely differently on Thursday would have been disappointed.

Cryptocurrencies are heavily impacted by major market forces.

While crypto was designed to hold value independent of the stock market, the two are still very much entwined. Over the last few years, tokens like Bitcoin and Ether have risen and fallen in correlation to larger market trends. This year, Ether prices have been depressed ever since the Federal Reserve announced its intention to institute a series of aggressive interest rate hikes in order to combat inflation. High interest rates dissuade consumers from investing in more risky assets, which includes crypto.

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Read More: Why Bitcoin Keeps Crashing

And last Tuesday—two days before the merge—a Consumer Price Index report showed that inflation in the U.S. remains stubbornly high. More inflation means higher interest rates: Federal Reserve Chairman Jerome Powell responded by saying that the central bank must act “forthrightly, strongly” to fight inflation. And the market responded in turn: the Dow Jones Industrial Average fell more than 1,200 points, making it the index’s worst day since June 2020. Ether, naturally, fell amidst the downturn. The Federal Reserve’s decision about a potential hike is expected to be released this Wednesday.

Investors worry about regulation.

Is Ether a security? The question has been debated since the very beginning of Ethereum, with the blockchain’s developers hoping to avoid passing the Howey…