What the merger means for investors


Key points to remember

  • Ethereum completed its first successful merger test on Wednesday for a long-awaited software transition
  • The entire Ethereum network is set to officially transition in August
  • Investors and developers bullish on Ethereum’s future despite native coin ether down 50% year-to-date
  • Some analysts predict Ether could hit $2,000 over the weekend as investors applaud successful test

If you’re not a big crypto fan, you probably haven’t heard that the Ethereum network has struggled to transition from a proof-of-work concept to a proof-of-stake concept for several years now ( much less what either are).

But if you are big into crypto, you may have heard whispers of the historic blockchain transition underway. And last Wednesday, Ethereum took a giant leap forward on its journey to becoming a leaner, cleaner altcoin.

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Current performance of Ether

Ether (the native token of Ethereum) had a 2021 banner, rising from $775 to $3,768 in one year. But since then, the crypto has fallen dramatically, currently resting around $1,800 per token.

Granted, Ether’s sudden decline isn’t exactly its fault, and the token is certainly not alone in its misery. The entire crypto market has lost $1 trillion this year alone. The causes range from the inherent volatility of crypto (particularly after last year’s insane rallies) to increased risk at the peak of the Russian-Ukrainian war.

Additionally, soaring inflation and soaring interest rates have caused many investors to rush into less risky assets. The general increase in crypto investment over the past two years may also have contributed to the rising volatility as new faces become entangled with the sudden mood swings in crypto.

That said, Ethereum in particular also has struggling with the anticipation – and repeated disappointments – surrounding its impending software update. Known as the “meltdown,” it finally happened this week…at least the first stage did.

The big news from Ethereum

Cryptocurrencies and altcoins are often criticized for their time-consuming and energy-intensive operations. Many still rely on “proof of work” models that require an army of machines to solve complex mathematical problems. During the process, the proof-of-work process “mints” new coins and confirms transactions on the blockchain.

Relying on such a huge network of energy-intensive hardware produces astronomical amounts of carbon emissions (according to an estimationbitcoin mining devours the same amount of energy per year as the Netherlands did in 2019).

In recent years, Ethereum has pushed for a move to a cleaner and more efficient mining process known as “proof-of-stake”. In this model, token holders can “stake” their own coins on the blockchain to verify transactions and create new tokens. The process is both greener (Ethereum is expected to reduce emissions by 99%) and produces faster, cheaper transactions.

But moving an entire blockchain network from one system to another doesn’t happen overnight. Developers and coders have been solving this problem for years, battling obstacles and bugs along the way.

But on Wednesday, June 8, Ethereum developers performed the first of three major tests before completing the merger – and the network passed (mostly) with flying colors.

A successful (clean) test

Since December 2020, Ethereum developers have been tinkering with “the beacon”, an Ethereum chain that runs alongside the existing blockchain. The beacon offers developers a place to build, test, and tune the proposed proof-of-stake system without affecting the rest of the blockchain.

So far, the developers have simulated the upcoming merger by combining testnets (testnets) that simulate Ethereum’s mainnet (mainnet) with the beacon. These tests allow developers to see how the code behaves in a real environment.

But last Wednesday, the Ethereum developers took another step: they managed to merge the oldest Ethereum testnet, “Ropsten”, with the beacon chain. This makes Ropsten the first testnet to undergo a full merger, and its success will allow developers to study the new proof-of-stake system for several weeks to ensure operations run smoothly.

Upcoming changes

Wednesday’s testing exercise is the first concrete proof that Ethereum can transition to proof-of-stake validation with minimal hassle. Although the developers found some minor bugs, the consensus is that the current issues will be easily fixed. Still, Ethereum developers plan to run at least two more full merges before “the” merge.

Following the successful test, Vitalik Buterin, one of the co-founders of Ethereum, informed the community that stakeholders could see the merger go live as early as August 2022.

Next: Ethereum Halving

But the technical aspects of the merger are not the only ones stakeholders need to worry about. Assuming the transition does not experience another delay, investors can also expect the change to have a significant impact on the value of their portfolios.

But why?

Because the merger will push Ethereum miners out of business in favor of the stakeholders, new ether coins will be issued at much slower rates than we are currently seeing. Upgrading also involves reducing the supply of Ether via “burning”, the removal of coins from circulation. The fire will put deflationary pressure on the network and will likely cause token prices to rise.

Additionally, an early change to the minting process has been referred to as an “Ethereum halving” or “triple halving”. This will limit Ethereum’s new supply as the number of coins produced per validation is reduced. Although the process is similar to the bitcoin halving, it is expected to be the equivalent of three bitcoin halvings, hence the name.

High-potential and wary markets

Many members of the crypto community are eagerly awaiting the official merger. However, the price of Ether remains surprisingly low compared to its potential gains following the expected merger.

So what gives?

On the one hand, many investors fear that the merger will actually happen on schedule. Although the testnet run was successful, Ethereum’s transition to proof-of-stake was delayed several times over several years.

There are also some questions about how investors and companies that have built the technology on the existing blockchain will react to the changes. If the move affects their livelihoods, it is possible that the ether will suffer collateral damage.

Still, many optimistic analysts are predicting that Ether could see prices as high as $2,000 over the weekend as more investors get wind of the test’s success. And if enough investors jump on the bull bandwagon, positive investor sentiment could see Ether recover more of its lost gains in the coming weeks.

What does this mean to you

Cryptocurrency is a notoriously volatile asset class, and when the market doesn’t immediately jump on the good news, it’s tempting to bet big and hope it pays off when investors jump on the bandwagon.

However, even – or perhaps especially – in crypto markets, attempting to time the market is a bad idea. Aside from the regular risks and the fact that many market timers lose more than they win, crypto is not chained to regular trading hours. As such, tokens are traded 24/7 around the world, which means there are more opportunities than ever to miss a big swing and lose your investment.

Crypto enthusiasts should also be wary of pouring too much money into a single crypto, regardless of current prices or news. As with investing in stocks, bonds, and ETFs, experts often advise diversifying your crypto holdings to take advantage of a wider range of upside while spreading the risk of downturns.

And while many investors will be tempted to invest or cash out completely before the Ethereum merger, here too it is best to take a long-term approach with your investments.

Balance crypto risk and reward with Q.ai

Even in investment markets, betting on cryptocurrencies is still a bit of a gamble. These new tokens have a lot of hype and cause a lot of confusion about their value, potential, and complexity.

All that to say, we don’t blame you if you’re a little lost when it comes to cryptos, from their true value to whether (and where) you should invest.

Luckily, Q.ai makes it easy with our AI-based encryption kit. Using the technical and analytical prowess of artificial intelligence, our AI can handle the selection, trading and management of crypto assets.

So whatever happens with Ethereum now, and whatever happens when the next coin gets its 15 minutes of fame, our Crypto Kit has you covered.

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