Phew! The past few weeks have been tough for Ethereum investors. The DeFi heavyweight has dropped below $1,700 and now trades roughly 55% lower than the $3,722 level it opened the year at.
BTC Leads
Ethereum supporters are also worried because ETH has underperformed Bitcoin for about the last month. Although the entire crypto market suffered a sharp downturn driven by macroeconomic pressures and the fallout from the Terra collapse, Bitcoin has managed at least modest rallies in recent days while Ethereum continued to slide.
The chart below illustrates ETH’s performance relative to BTC. During 2020 and 2021, ETH significantly outpaced BTC amid the bull market, taking advantage of higher volatility and a smaller market cap. However, when the market turned earlier this year, Bitcoin reasserted its dominance over other cryptocurrencies, as often happens during broad pullbacks.
Additional Headwinds
Looking at fundamentals reveals reasons why ETH has fallen beyond the general market bloodbath. Crypto enthusiasts remember the much-promised Merge that was repeatedly delayed and re-announced. Those delays evoke unpleasant memories for me of repeated lockdowns in Ireland.
We were placed in lockdown roughly five times (ranging from three weeks to six months). Each time authorities promised it would be the last, yet measures returned, often quickly and repeatedly. Curfews, 2 km mobility limits, restrictions on exercise and more—these measures were extended repeatedly as the government adjusted plans.
Although the Merge was penciled in for August, last week reminded everyone that nothing is set in stone: the Beacon Chain experienced a seven-block reorganization (reorg), a notable hiccup. Specifically, blocks numbered 3,887,075 through 3,887,081 were removed from the Beacon Chain between 08:55:23 and 08:56:35 UTC.
In plain terms, a reorg happens when a block that was part of the canonical chain is displaced by a competing block—typically the result of an attack or a software bug.
The Ethereum beacon chain experienced a 7-block deep reorg ~2.5h ago. This shows that the current attestation strategy of nodes should be reconsidered to hopefully result in a more stable chain! (proposals already exist) pic.twitter.com/BkQrKuUlw1
— Martin Köppelmann 🦉💳 (@koeppelmann) May 25, 2022
The Ethereum developer Preston Van Loon suggested the event resulted from “non-trivial segmentation” between new and old client software versions, indicating the reorg did not pose an immediate danger. Ethereum co-founder Vitalik Buterin described that explanation as a “good hypothesis.”
This, unfortunately, shows that the analysis by @gakonst and @VitalikButerin here was too optimistic when the article claimed re-org stability will improve in POS over POW.
We have not seen 7 block reorgs on Ethereum mainnet in years.https://t.co/G5g8acG3L8 pic.twitter.com/AvZ6ygZRxs— Martin Köppelmann 🦉💳 (@koeppelmann) May 25, 2022
My Thoughts
While this incident is concerning, it shouldn’t derail confidence in Ethereum’s long-term prospects. Still, the reorg highlights how fragile the timeline for the August Merge can be. Many have stopped predicting exact dates for this elusive upgrade, but the crypto community may be underestimating the scale and complexity of the task.
Last week’s ETH drop—despite Bitcoin holding up better—can partly be attributed to renewed doubts about the roadmap. With the Merge slated for August and markets extremely sensitive right now as investors focus on survival, any uncertainty tends to trigger sell-offs.
Sentiment across the broader market is still worse than at many points since the Global Financial Crisis, and after Terra’s collapse, cryptocurrencies face added pressures. The sector needs Ethereum to deliver on its promises and execute a successful Merge.
There is reason for cautious optimism: the Ropsten testnet Merge produced encouraging results recently, marking a crucial step toward the mainnet transition. Personally, I keep thinking of past assurances that proved premature—like expecting lockdowns to last three weeks—so I remain cautiously hopeful rather than overly confident.
Let’s hope we’ve learned from previous missteps and that the Merge proceeds as planned in August.