The Post-Merge Effect: How the Fed’s Rate Increase Disrupted the Crypto Scene

The Merge, the Fed rate hike, and the yo-yo effect on cryptocurrencies

The Federal Reserve announced a significant rate increase, immediately sending the cryptocurrency markets into a tailspin. The assets went up the first hours after the Fed’s latest hike of the interest rate, which then plummeted dramatically.

The price of Bitcoin was more than double its current level a year ago. Bitcoin’s price was recently around $18,500, which saw a decline of close to 3% over the previous 24 hours. It dropped significantly lower than that on Monday (UTC), hitting its lowest level since the beginning of June. 

Currently, Ether is being bought and sold for about $1,250- 5.5% less than the day before. ETH’s price has been dropping since the Merge last week –  a milestone event in which Ethereum updated its network. Prior to this announcement, many other cryptos had risen and then fallen sharply, including EOS (by nearly 15%), ADA, and  YGG (both by over 4%).

Investors see potential long-term benefits from this change and are willing to wait out any immediate adverse impacts on price. Investors will be keeping an eye on ETH’s “Shanghai” upgrade, to see if it allows users the ability to withdraw staked Ethereum. 

Ramifications on the Global Economy 

The increase in interest rate caused a day of global economic turmoil. Two-year Treasury yields, which are inversely related to crypto prices, rose over 4% after the Fed’s announcement – the highest level in over a decade. 

It’s also impacted the real estate market, with the number of home sales falling for the seventh month in a row. With three-decade fixed mortgage rates now at over 5% for the first time in almost a decade and a half, the decline is expected to go on.

In the meantipme, Russian President Vladimir Putin ramped up macroeconomic and global uncertainty by announcing the mobilization of 300,000 troops to support the country’s invasion of Ukraine. Energy costs and supply chains globally have been affected by Russia’s attack.

However, monetary and inflation policies are still vital to most people who invest in or observe the cryptocurrency industry. Research analyst Riyad Carey from crypto data company Kaiko pointed out “a sharper price reaction to the CPI release than to the [Ethereum upgrade] Merge.” He also stated that he was skeptical about crypto’s ability to resist the Fed’s influence in the near future, especially in the case of BTC and ETH, the industry’s celebs.

Major Stock Indexes Left Teetering

Cryptocurrencies followed major stock indexes throughout the day, which swayed wildly in the early stages before plummeting after the announcement. The Dow Jones Industrial Average (DJIA) fell 1.8%, while Nasdaq and S&P 500, which have a strong tech component, dropped 1.7 percent each. As markets analyzed Federal Reserve remarks, indicating more inflationary response was on the way. However, the major crypto exchanges did not suffer significant losses on the day, with Coinbase and similar cryptocurrency-exposed businesses seeing gains.

After the data showed that inflation remained unchanged and the economy wasn’t slowing down at a speed the bank had hoped, the Federal Reserve proceeded to hike interest rates by a substantial 75 points for the third time in a row. Officials who contributed to the most recent policy decision have stated that the bank should raise rates at its next two Federal Open Market Committee meetings by 1.25%.

The Federal Reserve is striving to reduce inflation to 2% from where it is now, at a four-decade high of 8%. “My main message has not changed at all. The FOMC is strongly resolved to bring inflation down to 2% and we will keep at it until the job is done.”, said Fed Chair Jerome Powell during a press conference in reference to his speech last month at the Fed’s Economic Symposium in Jackson Hole, Wyoming.

The Next Phase of the Ethereum Post-Merge

The fall of Ether has prompted underlying questions about the long-term future of Ethereum. While many people are excited about the platform’s long-term potential, some prominent experts are concerned that the Merge will bring forth new challenges.

Traders dumped Ether prices by 15% in the previous week. The fall has coincided with stock market downturns and rumors on social media about the potential centralization of the Ethereum system.

One popular viewing party last week attracted 40,000 people to the Ethereum Merge. Still, the long-awaited transition to a quicker, more environmentally friendly proof-of-work algorithm failed to wow many investors.

Ethereum Facing Its Biggest Challenge Yet

According to the executive director at ARK36 and crypto hedge fund Anto Paroian, Ethereum is up against its ‘biggest test’ at the moment.

Talking about cryptocurrencies currently locked up on various Ethereum-based applications worth billions of dollars, Paroian said that “Although the proof-of-work and the proof-of-stake blockchains have successfully merged, only now would it be possible to discover the full impact of the Merge on the vast ecosystem of apps built on top of the Ethereum blockchain”.

“This includes the [decentralized finance] space which is currently valued at around $56 billion. We should all be prepared for strong downside volatility in case of any glitches and previously unforeseen mishaps,” he noted.

In addition to the short-term technological market effects, some say Ether may face legal challenges in the next few months. This is due to the network giving rewards to users who run nodes – blockchain software specialized to process Ethereum transactions.

Some analysts believe ETH may become a security token after the transition to PoS. Many financiers believe this could happen because the coin will have characteristics of a security with the expectation of making a profit. However, CEO of EXMO, Serhii Zhdanov, warned of a worst-case scenario where such an outcome proves to be a “disaster for ordinary users” leading to token delisting from crypto exchanges.

Attracting Investors From the ESG Sector

Paul McCaffrey, crypto strategist at KBW McCaffrey, said that he still believes cryptocurrencies will be successful in the long term as more network validators join and help to address concerns. Despite some recent price instability, others agreed that the Merge is a long-term indicator of healthy stock options.

Austin Kimm, director of strategy at Choise, said that “the Merge could be more of a longer-term playout in the price as the upgrade is likely to attract more institutions, which could benefit ETH/USD price over a longer term,”. But, he quipped, “Ethereum is still the granddaddy of all blockchains with approximately half of all tokens being created on and using the network.”