Uff. Not a great couple of weeks for Ethereum investors: the DeFi king has fallen below $1,700 and is now trading roughly 55% under its $3,722 opening price on New Year’s Day.
BTC Dominates
Another concern for supporters of Vitalik’s creation is Ethereum’s underperformance against Bitcoin over the past month. While the broader market has declined amid negative macro sentiment and the fallout from the Terra collapse, Bitcoin has at least seen brief relief rallies in recent days. Ethereum, by contrast, has largely drifted downward.
The chart below shows ETH’s performance versus Bitcoin. Ethereum outperformed Bitcoin through 2020 and 2021, as the bull market rewarded ETH’s higher volatility and smaller market cap. Now that the market has shifted this year, Bitcoin has reclaimed dominance across crypto—something that often happens during retracement periods.
[inv-florish id="10149220"]
Additional Problems
Looking into fundamentals reveals factors behind ETH’s decline beyond the general market rout. Chief among them is the long-promised Ethereum merge, which has been delayed and rescheduled so many times it has become a running joke among crypto enthusiasts. At this point, talk of the merge triggers the same uneasy memories I have of lockdowns back home in Ireland.
We had five lockdowns in total, ranging from three weeks to six months. Each came with assurances it would be the last, but they kept returning—curfews, travel limits, exercise quotas and more—an exercise in kicking the can down the road as the government repeatedly missed its own targets and failed to plan ahead.
Although the Ethereum merge is still apparently scheduled for August, last week served as a reminder that nothing is guaranteed. The Beacon Chain experienced a seven-block reorganization (reorg) last week, a stumbling block for the timeline. Specifically, seven blocks—from 3,887,075 to 3,887,081—were removed from the Beacon Chain between 08:55:23 and 08:56:35 UTC.
For readers unfamiliar with technical jargon: a reorg occurs when a block that was previously part of the canonical chain is replaced by a competing block. Reorgs can result from either malicious attacks or unintended errors.
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
Ethereum developer Preston Van Loon suggested this event resulted from a “non-trivial split” between new and old client node software, ruling out malicious intent. 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
This was a hiccup rather than a long-term catastrophe, but it highlighted how tight the August timeline is. Many stopped predicting exact dates for this elusive upgrade long ago, yet the scale and complexity of the merge have clearly been underestimated by parts of the crypto community.
Ethereum’s recent weakness—wobbling last week while Bitcoin held up—can likely be attributed to renewed doubt about the roadmap. With the upgrade largely priced in for August and investors currently focused on survival, any negative headlines tend to trigger selling pressure.
Given the poor sentiment across markets—worse than anything since the global financial crisis for some participants—and the broad questions facing crypto after the Terra collapse, the sector needs Ethereum to execute the merge successfully.
I remain cautiously optimistic that the merge will occur in August. The Ropsten testnet merge produced encouraging results earlier today, and that’s one of the key steps before transitioning the mainnet. But I also remember thinking lockdowns would last three weeks and then finding myself spending so much time indoors that I forgot what the sky looked like.
Let’s hope history doesn’t repeat itself on this timetable.