This could be the most impactful cryptocurrency event of 2022. In what’s known as the Merge, Ethereum (ETH-USD) mining is switching from a proof-of-work to a proof-of-stake framework. Perhaps due to fear and misunderstanding of the Merge, Ethereum lost some value recently, but this doesn’t mean you should cut and run.
First unveiled by Ethereum’s developers in 2020, the Merge garnered interest and anticipation among the crypto community during the past few weeks. Yet, some Ethereum holders might not understand this monumental event or its far-reaching implications.
There’s an old saying in the world of stock market investing: Know what you own. This is equally true when it comes to cryptocurrency, but do you really know Ethereum and how it’s mined in 2022? Misconceptions may have prompted a selloff, but soon enough there ought to be a substantial post-Merge surge.
Ethereum Drops During the Merge
Last week, Ethereum knocked on the door of $1,800 for the umpteenth time without opening it. The failure to break through that level was disappointing, and ETH quickly declined to the $1,400 area.
Granted, this took place while the stock market was falling. Sometimes, there’s a strong price correlation between stocks and cryptocurrency. However, many ETH traders were also focused on a major event. It’s known as the Merge, and it’s bound to impact cryptocurrency investors for the foreseeable future.
Ethereum’s developers define the Merge as the “upgrade from the original proof-of-work mechanism to proof-of-stake.” This event took place on Sept. 15.
Just to review, proof-of-work means ETH transactions are done through mining activity among competing miners. In contrast, proof-of-stake means the transactions are validated by the blockchain’s stakeholders.
Some crypto critics will point out that cryptocurrency mining uses up a great deal of energy. However, the Merge offers a solution to this problem, as switching from proof-of-work to proof-of-stake is expected to reduce energy consumption by around 99%.
The Merge Is Bad for Some Miners, But Good for Many Investors
One upshot of the Merge is that now, there’s no need for thousands of Ethereum miners to maintain the network and consume so much electricity in the process. It’s great that less energy will be expended, but not everyone will benefit from the Merge.
Chandler Guo, an Ethereum miner, predicts that 90% of proof-of-work miners will go bankrupt. This forecast might or might not turn out to be true.
It’s undeniable, however, that high-energy-consuming mining rigs are out, and the proof-of-stake paradigm is in. Merge advocates are calling the event an upgrade. Making some ETH miners obsolete is a scary proposition, though.
This fear may have prompted some traders to sell their Ethereum as a knee-jerk response. They ought to consider the benefits of the Merge, however.
As InvestorPlace contributor Brenden Rearick explained, the switch to proof-of-stake “makes the network much more energy efficient.” Moreover, it “stands to lower transaction times and gas fees for network users, making lots of investors happier.”
What You Can Do Now
The key to success as an Ethereum investor is to be patient and understand what’s driving the price movements. For a short time, traders might dump their ETH if they don’t fully understand the Merge and its implications.
However, the long-term impact should be less energy consumption and, therefore, an environmentally friendlier Ethereum network. In time, the Merge will prove to be a significant upgrade, leading to a well-deserved recovery in ETH.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.