Ethereum Merge Brings 'Sell-the-Fact' Price Move in Crypto Markets

The price of ether (ETH) tumbled suddenly in cryptocurrency markets Thursday, ending a stretch of price stability that prevailed in the hours after the Ethereum blockchain completed its historic shift to a more energy-efficient proof-of-stake blockchain, known as the Merge.

At press time, the second-largest cryptocurrency by market value was down 9.1% to $1,489, its biggest daily decline since Aug. 26. By contrast, bitcoin (BTC), the largest cryptocurrency, was down only about 2% on the day. The CoinDesk Market Index was down about 4%.

The sudden price dump looks like a "buy-the-rumor, sell-the-fact" response, said Riyad Carey, a research analyst at crypto data firm Kaiko.

“There is still a lot of leverage in ETH markets, so volatility should be expected and will probably be welcomed by traders who watched the Merge go by without much of a move up or down,” Carey told CoinDesk in a written note. “We’ve also seen market depth decrease and spreads increase, so that will likely factor into larger price movements.”

The 'Ethereum Merge trade' unwinds

CoinDesk reported earlier on blockchain data showing that investors were sending ETH to crypto exchanges in droves – often taken as a sign that holders are getting ready to dump. The cumulative inflow of $1.2 billion was the largest in six months.

By most accounts, the Ethereum blockchain appears to have dodged major technological snafus that might have led to a much deeper price crash.

“Many believe that the Merge might make Ethereum faster or cheaper," Will Harborne, founder and CEO of the rhino.fi protocol, told CoinDesk. "This is not the case. For end users or developers, there should be no noticeable difference between Ethereum before and after the Merge.”

CoinDesk Special Coverage: The Ethereum Merge

Data from crypto futures markets shows that many investors appear to have closed out hedged positions in the hours after the Merge went through – a sign that they are wrapping up trades they had made during the previous month or past few weeks to bet on possible outcomes of the event – including the possibility of a revolt by crypto miners who want to keep working on a "proof-of-work" system similar to Bitcoin's, which Ethereum used until early Thursday.

Some investors were jockeying to maximize their rewards from a new "airdropped token" from whatever proof-of-work change continues on, referred to colloquially as ETHPOW.

“I think that you wouldn’t have to throw many rocks to find a fund that has a healthy nine-figure position on the Merge, long spot short derivatives or something like that," said Abraham Chaibi, co-founder of Dexterity Capital. "They’re going to unwind, that’s definitely going to happen.”

Meanwhile, the price of Ethereum Classic's ETC token – thr native token of another proof-of-work blockchain that some miners see as a viable alternative – was down 2% to $36.34.

Ether options

In the crypto options market, traders were selling out of contracts designed to profit from high volatility. Ironically, that volatility is arriving now.

“ETH peaked at $2,000 one month ago and has seen a sharp drop today once the Merge was deemed successful. The market had priced in a successful Merge, and so far this seems to have come to fruition," Marc Arjoon, a research associate at CoinShares, said.

“The level of asymmetric information around the Merge creates several pockets of narratives, so I expect a lot of volatility. Investors should definitely be cautious, as always, and expect volatility in price and narrative," he added.

In the two-week run-up to the Merge, the price of ether was up 4%, but it remains down 16% on the month, according to market data.

Ethereum co-founder Vitalik Buterin had been quoted on the "Bankless" podcast as saying the Merge was “not going to be priced in pretty much until after it happens.”

According to EtherNodes, 88% of ether nodes were Merge-ready and synced in the moments leading up to the event. In total, 12%, or 305, nodes appeared to be recalcitrant, with the transition with the majority from the Geth network.

'Volatility for at least the next 24 hours'

“Although it (the Merge) happened without any technical hitches, there are also some other undercurrents, such as the new EthereumPoW (ETHW) network, a new form off of the old Ethereuem that will retain mining,” Bitbull Capital CEO Joe DiPasquale told CoinDesk in an email. “We expect this volatility for at least the next 24 hours.”

Investors were quick to point out that crypto markets remain under the shadow of the crash earlier this year, and bitcoin in particular, which often dictates the overall industry's price direction, is under pressure from monetary-policy tightening at the U.S. Federal Reserve.

In the weeks before the Merge, bitcoin and ether appeared to be traveling on separate trajectories. It's possible that ether might now recouple with its larger rival's price action.

“If this happened last year, we’d be at $8,000 already,” March Zheng, a Shanghai-based partner at Bizantine Capital, said to CoinDesk via WeChat.

Brent Xu, founder and CEO at Cosmos-based borrowing and lending platform Umee, said despite some choppiness in the market environment, he has a bullish outlook on Ethereum’s growth in the long term with the network’s switch to PoS, versus bitcoin remaining a good store of value.

“Think of cars. All the engines are like gasoline engines. It wasn’t until the first electric engine was created that cars can go really fast and for long amounts of time. And this is the same with crypto,” he told CoinDesk in a video interview. “First, we have proof-of-work, which is like gasoline engines. But now Ethereum is the first protocol to have a big upgrade to use electric engines, and the possibilities with electric engines are so much bigger. And this is the moment ... it can skyrocket in terms of value, new dynamics, scalability, interoperability and privacy.”

Oliver Knight contributed to this report.