Ethereum Merge Success Overshadowed by High Inflation Pressure

Eth illustration

One of the biggest blockchain upgrades in cryptocurrency history was not enough to renew bullish optimism as macroeconomic factors forced prices lower last week.

After Ethereum’s Merge was successfully completed, crypto markets fell back towards June 2022 lows as stronger than expected inflation figures were released. 

Economists now believe that stubborn inflation leaves the Federal Reserve with little choice but to increase interest rates once again during this week’s upcoming FOMC meeting.

  • Higher than expected inflation figures push cryptos lower
  • Ethereum Merge success runs into sell-the-news phenomenon
  • White House releases first ever cryptocurrency framework for federal agencies

Higher than expected inflation figures push cryptos lowers

Cryptocurrency markets turned lower on Tuesday alongside global financial markets as the US released higher-than-expected inflation figures. The Consumer Price Index for the month of August recorded an 8.3% year-on-year increase which was, unfortunately, 0.2% higher than economic expectations. 

Economists were expecting a dip in inflation to 8.1%, which many hoped would cause the Federal Reserve to question if another interest rate hike would be necessary. A relief in interest rate hikes would be positively welcomed by the markets.

However, the higher-than-expected result means that it is now more likely that the Federal Reserve will not change its hawkish stance heading into this week’s FOMC, which is set to take place on Wednesday.

During the meeting, the Central Bank is expected to increase interest rates by a further 0.75%, which will be the third 75 basis point hike in 2022. Raising interest rates continues to be one of the very few options that the Central Bank has to reduce consumer demand and, therefore, lower stubborn inflation. 

As last week’s CPI results were released and the inevitability of higher interest rates was discovered, Bitcoin and Ethereum dropped 11% and 10% respectively, relinquishing most of the gains from the previous week. This was echoed in the stock market where the Dow Jones 30 and the S&P 500 fell 4.9% and 5.5% on the day.

All eyes now turn to Wednesday’s FOMC meeting to see exactly what the Federal Reserve does and what officials say regarding future rate plans.

US CPI figures between August 2002 and August 2022.

Ethereum Merge success runs into sell-the-news phenomenon

After several years of deployment, the Ethereum Merge, which has taken the Ethereum blockchain from Proof-of-Work to Proof-of-Stake, was seamlessly implemented on September 15th at 3am EST. The news was confirmed by Ethereum developers who celebrated the special moment.

Each new block added to the blockchain is now verified and counted by a network of staked validators rather than a network of energy-consuming miners. 

It is one of the most significant upgrades the cryptocurrency industry has ever witnessed and has reduced the blockchain’s energy output by 99.9%; which is equivalent to a 0.2% reduction in global electricity consumption according to Vitalik Buterin.

Although the Merge is one of the most significant updates the cryptocurrency industry has ever seen, it is only 1 part of a 5 step process for the Ethereum blockchain. 

The following steps to get Ethereum to the ‘end game’ include the Surge, the Verge, the Purge, and the Splurge, and will occur over the next few years. Now that the blockchain is using far less power, Ethereum developers will focus on improving scalability and data storage.

Unfortunately, even though it was one of the greatest upgrades the industry had ever witnessed, it was not enough to stop the price of ETH from falling after the event. 

The bearish macro factors of higher-than-expected inflation and upcoming interest rate hikes were too heavy for investors to shake and resulted in the second largest cryptocurrency falling nearly 15% in the 24 hours after the event.

Bearish pressure was also likely exacerbated by sell-the-news dynamics as investors bet that prices of ETH would fall once the hype of the upgrade was over. Both factors likely had a hand in crumbling ETH prices. 

The coin eventually recorded a 24% fall over the week and remains down 73% from all-time highs.

Tweet from Ethereum developer, Tim Beiko, confirming the Merge

White House releases crypto framework which includes plans for digital dollar

The White House released its first-ever cryptocurrency framework on Friday that outlined exactly how federal agencies throughout the country should tackle cryptocurrency regulation and oversight. 

The cryptocurrency framework was released as a result of President Joe Biden’s executive order which was signed earlier in the year. According to the order, federal agencies needed to study and begin to understand the crypto industry so that constructive policies could be developed.

The recent framework has ordered the SEC and CFTC to enforce the law and come down hard on scammers within the industry. The US Treasury has been ordered to complete illicit finance risk assessments within both the DeFi and NFT sectors, and there needs to be continued efforts to align cryptocurrency projects with the country’s net zero emissions economy.

In addition, the White House also instructed the US Treasury to continue research and development into an official U.S Central Bank Digital Currency (CBDC); a digital version of the US dollar.

The digital dollar would become a digital form of a US dollar banknote and would, therefore, be placed in direct competition with existing US dollar stablecoins, such as USDC and USDT. USDC and USDT both have market caps of over $50 billion. 

The new cryptocurrency framework was received positively by members of the cryptocurrency community as regulation brings wider adoption. However, there is still concern that new policies could also end up breaking the industry’s back.

White House front

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