Crypto Market Musings
The long-awaited Ethereum Merge occurred September 15th at around 3 AM ET. As of this writing, ethereum is down around 8% following the Merge. The Ethereum blockchain has now moved from a proof of work consensus mechanism to proof of stake. Let’s break down what this means.
In order for the blockchain to work, a large number of computers need to verify transactions. Proof of work — the first ever blockchain legitimizing approach — relies on “miners” to solve various complex, asymmetrical math problems to validate a “block.” Once verified, a block can be attached to a chain of blocks that have also been verified, hence “blockchain.” A crypto reward incentivizes miners to solve these problems and add to the blockchain.
Proof of stake has the same purpose as proof of work. This time, instead of miners, those verifying transactions are called “validators.” With proof of stake, there is no competing to solve a computational puzzle. Validators simply “stake,” or lock up, some of the currency. Once that currency is staked, users are eligible for a reward or the opportunity to create a block to add to the blockchain. If the validator creates a malicious block, the stake can be lost.
Why does this matter? Perhaps the biggest reason for the ETH Merge from proof of work to proof of stake is the amount of energy that will be saved. The mining process requires massive amounts of computational power. Take bitcoin, which still uses proof of work. One single bitcoin transaction needs more energy than what would be required to power three homes in the United States for an entire day. Talk about an upgrade.
What Olivia Is Thinking About
My father is an economist by trade. When I first started talking to him about cryptocurrency, he was skeptical at best. This was back in 2020, which happened to be a bitcoin halving year. I encouraged him to get in on BTC prior to the halving event in May, suggesting that it would likely spark a bitcoin bull run as it had in the past. (A bitcoin halving refers to the reduction in reward for bitcoin miners.)
Bitcoin halvings, like the Ethereum Merge, are relatively predictable. There are expected dates for when these events will occur. In fact, there are dedicated countdown websites. I would have been remiss if I hadn’t mentioned this to my dad, who was considering investing just before a halving. His response: “If you know about the event, is it not priced in?”
He makes a fantastic point. Many of my conversations with him about crypto revolve around how crypto is and isn’t tied to other centralized markets. In some ways, crypto follows general economic principles. And in others, it doesn’t. Which brings me back to the question, if everyone knows when the next bitcoin halving will occur — or knew when the Ethereum Merge would happen — why do these events still move the markets?
For one, pricing is an art, not a science. In theory, everything should be “priced in.” We expected several times this summer for the Fed to hike up the interest rate by 75 basis points — yet when it did, the markets still moved. Additionally, there are a number of micro and macro market actors that are not, as much as we would probably like them to, going to act in concert. It is impossible to look at any one event in isolation.
And finally, humans are illogical. For example, despite it being widely known that bitcoin supply is limited, halvings still remind us that bitcoin is scarce. In this sense, bitcoin follows the general economic principle of scarcity and demand. Prices go up if there is demand for a scarce resource. But the idea of scarcity for a digital asset is somewhat abstract. And as illogical humans, it can be easy to forget. So the reminder that bitcoin is limited spurs market action that seems obvious in retrospect.
It will be interesting to see how the Ethereum Merge impacts ETH’s price in the short and long term. In theory, the Merge should’ve been priced in. The mid-September date was anticipated for some time, despite there being a few delays. The futures market — which is more keen on pricing strategy — has ETH spiking post Merge only to plummet in October. Only time will tell.
And Finally…
September means that it is officially pumpkin spice season. And as Starbucks prepares to cater to East Coast, millennial, Ugg boot owners, it is also preparing to hop on the NFT train. The coffee enterprise will be introducing an NFT rewards program on the Polygon network. The program, named Starbucks Odyssey, lets users collect NFT stamps that offer rewards. I joined the waitlist yesterday.