How the Ethereum Merge and Next Week’s Fed Meeting Will Shake Up Bitcoin and Other Crypto Prices

Image to accompany story about what's going on with crypto prices this week
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What do the ethereum merge and next week’s Federal Reserve meeting have in common? 

For starters, both are likely to shake up the crypto market, adding a new surge of volatility to the prices of bitcoin and ethereum. Actually, that might be all they have in common.

The ethereum merge took place on Thursday, completing one of the largest events in crypto to date. It’s expected to make the currency more climate friendly, but it does come with significant risks, which have major implications for investors. The token has already been on shaky ground, seesawing up and down over the last couple of weeks. Most recently, ethereum’s token, called ether, dipped after Labor Day, rallied above $1,600 mid-week and fell again below that number on Tuesday afternoon. Ether has been teetering in and out of that threshold since then. 

Bitcoin’s prices have gyrated similarly. The token saw steep drops earlier this week following the release of the latest Consumer Price Index, which showed that inflation slightly increased month-over-month. On Tuesday, bitcoin slipped under $21,000 and continued to fall, eventually dipping below $20,000 –– a key price point for the token. It’s just barely climbed over that threshold again as of Thursday morning. This price drop brings an end to last week’s rally following a three- month low for the token.

The stock market saw similar tumbling following the CPI release, and the crypto market has increasingly tracked the stock market in recent months. Experts anticipated inflation to slightly dip in August, but prices instead swelled by 0.1% month-over-month. The crypto market is highly sensitive to those inflationary pressures, since the Federal Reserve is hiking interest rates in response to inflation. And doing that comes with significant (and also “necessary,” according to Fed Chair Jerome Powell) pain points for the economy. 

“Bitcoin is in the crosshairs amid frenetic selling pressure as the CPI data dimmed any hopes of moderation from the Fed in its efforts to curb inflation,” according to Bitfinex Market Analysts, a cryptocurrency exchange based in the British Virgin Island. “Battered high-growth tech stocks are continuing to be a proxy for bitcoin amid steep falls across the Nasdaq. As a nascent market built on new technologies, the cryptocurrency space finds itself exceptionally vulnerable to the bearish sentiment sweeping across financial markets.”

With two major events occurring back-to-back, crypto is in for a big week –– for better or for worse. Here’s what investors can expect.

How the Ethereum Merge Will Introduce New Volatility Into the Crypto Market

The ethereum merge has been highly anticipated in the crypto community, and it was finally completed in the wee hours of the morning on Thursday. Whether it will boost ether’s price or tank it over the long term is pure speculation at this point. After initially holding steady, ethereum dropped below $1,500 late Thursday morning.

It’s called “the merge” because ethereum will transition from what’s known as “proof of work” to “proof of stake” through the merging of two blockchains. The change could cut ethereum’s electricity expenditure by an estimated 99.95%, according to the Ethereum Foundation.

The merge comes with significant risks though, and that’s how the event might introduce new volatility into ether’s prices. Among other concerns, unforeseen bugs in the blockchain could cause outages, which could lead to significant price drops. Some experts believe the risk is largely baked into the price already, though, in which case potential price dips won’t be as severe.

“Sentiment toward the event has been overshadowed by larger, global macroeconomic forces,” Kruger said. “But overall, we think most of the event risk around the merge has been priced in, tilting the greater balance of risk to the downside in the immediate aftermath of a sell the fact type reaction.”

Ether’s price is down more than 40% since the beginning of this year, selling at nearly $4,000 in January to a price range of $1,500-$1,600 today. Some investors are hoping for rallies of more than $10,000 following the merge, but others are still feeling fairly critical and dubious. 

How the Fed’s Meeting Could Introduce New Volatility Into the Crypto Market

The Fed is essentially attempting to cool down the economy in order to rein in rising prices. Among other things, slowing down the economy is expected to decrease corporate profits and lower investor sentiment, causing further risk aversion in the market. All of this has the effect of causing crypto prices to drop.

We’ve seen this pattern play out repeatedly this year. When the Fed announced its third rate increase of 0.75 percentage points in June, bitcoin’s price dropped from above $22,000 to below $17,500. A similar but smaller drop occurred in July when the Fed increased rates again by the same number; bitcoin’s price fell by 5%. Experts generally agree on this relationship between inflationary pressures, the Fed rate hikes, and crypto prices.

“There’s no doubt the CPI report has triggered a fallout in risk assets and crypto markets by extension,” said Joel Kruger, Market Strategist at LMAX Group, a financial technology firm headquartered in London that operates foreign currency and crypto exchanges. “Given how things have been correlating, and considering this latest inflation data, we expect more downside pressure in crypto as investors are forced to contend with the reality of higher for longer monetary policy that strains growth prospects and weighs on sentiment. “

In fact, the crypto market has been so sensitive to the Fed’s doings that crypto tanked in late August when Powell made hawkish statements at an economic summit (not an official Fed meeting). With the CPI’s latest numbers, another rate hike next week is all but confirmed.

But will bitcoin and ethereum continue to be affected by further hikes? Experts believe so.

Kruger said he anticipates bitcoin and ethereum prices to suffer from continued Fed rate increases, “Because many market participants still look at crypto assets as being tied to a global risk sentiment, which is negatively affected as rates push higher.” 

How Should Crypto Investors React to the Ethereum Merge and the Fed Rate Hikes?

Both the merge and next week’s Fed meeting have the potential to tank crypto prices this month. It’s a risky month for ethereum particularly, as negative impact from the Fed and the merge could prove to be a double whammy.

The market is particularly volatile right now, as inflation numbers send crypto and stock prices tumbling ahead of another likely rate increase next week at the Fed meeting. Experts say you should stay the course on your long-term investments and avoid selling your assets in a panicked frenzy right now, especially as some experts are forecasting even steeper drops in the near future.

“We believe bitcoin should ultimately be used as a proxy for direction in the broader crypto market,” Kruger said. “Having said this, our expectation is that there is still potential for one more healthy dip, possibly down into the $10,000 area, before the market is then finally supported ahead of the next big run towards a retest and eventual break of the record high from late 2021.”

One thing’s for sure: If the last couple years have taught us anything, it’s that crypto prices are highly volatile and difficult to predict. The volatility of the market makes bitcoin and ethereum risky assets, and they become more volatile in economically uncertain times. 

That’s why investment experts recommend that you dedicate no more than 5% of your portfolio to crypto, and invest only what you’d be OK losing. As with any investment, experts say it’s best to invest for the long term no matter what’s going on in the market today.