Ethereum Is Planning a Major Software Update. Here’s What Investors Should Know

A photo to accompany a story about the Ethereum update known as the Merge (formerly Ethereum 2.0) Illustration by NextAdvisor
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Ethereum, the most popular altcoin and second-largest cryptocurrency by volume, is planning a major software update that could affect your crypto investments.

After years of being the number-one smart contract blockchain, Ethereum is transitioning to a less energy-intensive technology. You may have heard of the planned updates as Ethereum 2.0 or Eth2, but the Ethereum foundation now calls it Ethereum Merge. And some experts say there is upside for Ethereum investors. 

Ethereum’s price has generally hovered around $3,000 following its all-time high of $4,800 in 2021, but the update could affect Ethereum and other altcoins. Let’s look at what investors should know. 

What Will the Ethereum Merge Mean for Your Crypto Investments?

Some experts say the update could spur growth for Ethereum after new blockchain projects ate into its market share over the past six months.

“I do believe that we will see a positive reaction in the markets post-merge later this year,” said the YouTuber and crypto educator Hashoshi in a recent episode of his podcast “Crypto Over Coffee.”

That’s because the Ethereum merge could speed up processing and offer greater security and stability, and a 98% or greater reduction in Ethereum’s energy consumption, Hashoshi said. 

Related altcoins could see a price growth with this upgrade, says Armando Aguilar, an independent crypto analyst and former digital asset strategist at Fundstrat Global Advisors. 

“The positive momentum will be for those projects that are building on top of Ethereum such as Polygon, Arbitrum … among many others,” he says. Meanwhile, competing protocols such as Solana and Polkadot could see added pressure from the Ethereum ecosystem, as the upgrade will allow the network to scale, bring down transaction costs, and attract additional adoption of blockchain technology. 

Do Investors Need to Do Anything With Their Ethereum?

The Ethereum website states that current ETH holders don’t need to do anything in light of the merge. You can get more involved in the upgrade through staking or helping to test the upgrades, but your holdings remain the same.

“It’s like a software upgrade,” says Doug Boneparth, a financial advisor and president of Bone Fide Wealth.

Should You Change Your Investment Strategy?

There’s no reason you should do anything while things develop. It will take a while until everything is in place, and other factors such as increasing regulation could affect Ethereum and other cryptos during this time. 

“If you’re investing in Ethereum or any kind of blockchain technology, you’re investing in something that’s in its early days,” says Boneparth. “You’re going to need a long-term time horizon to see how things evolve. I really don’t think there’s a lot that folks who own Ethereum should be doing at this point.”

Instead, this is a great moment to strengthen your knowledge about crypto and blockchain tech, says Boneparth. “If you’re not an investor and you’re curious, this is a great moment of education. If you are an investor, and you still don’t understand, it’s a great moment to educate yourself and learn,” he says. 

The fact that there’s an upgrade and that blockchain transactions keep growing says a lot about the direction all of this is heading, notes Boneparth. “And it’s never ever, ever, ever too late to learn,” he says. “And that might just very well give you an edge or decide in terms of investing in crypto or any other cryptocurrency.”

With any crypto investment, financial planners caution you should never keep more than 5% of your portfolio in cryptocurrency. You should also prioritize paying off debt and padding your emergency fund rather than investing in crypto, no matter how tempting it could be to ride the wave. More than anything, experts say don’t invest any more than you’d be OK losing, since crypto is such a young and speculative asset class.

Should you still have room for some risk given these factors, Ethereum could be a decent bet. Along with Bitcoin, experts consider Ethereum among the safest crypto investments even before the merge might drive a return to prices closer to the all-time high it set in late 2021. 

The price of Ethereum has dropped more than 35% from its all-time high back in November 2021, and trading volume has lulled. And some bullish investors predict the price of Ethereum to rally to upwards of $10,000.

“After this latest drawback on prices, it might be smart for investors who have the appetite to be in the space to deploy some additional capital — based on their tolerance and their free cash — so that they can invest into this digital asset,” says Aguilar.

Pro Tip

While advanced DeFi traders might surf the winds of volatility and try to catch a favorable upswing, you can purchase Ethereum with a slow and steady approach if you believe its technology is here for good.

How Is Ethereum Updating?

Ethereum is in the first phase of moving to what it calls the Beacon Chain, which utilizes a consensus mechanism called “proof of stake.” 

Both Bitcoin and Ethereum when they first came out used a process called “proof of work”  to validate every blockchain transaction. Transactions get added to the blockchain, or digital ledger, in blocks via a systematic process. The proof-of-work system requires all the computer networks to agree and generate new blocks, which uses a lot of computing power. 

Proof-of-stake models cut down on this amount of energy use by having network participants stake cryptocurrency as collateral to vouch for the new blocks added to the chain, rather than having computers do it. Similar to how banks require pools of their customer’s money in order to turn around and lend money out, proof-of-stake models in crypto allow the ecosystems to circulate cryptocurrency the same way we circulate fiat dollars. Since the crypto was already minted once, proof-of-stake models take less time and energy to vouch for new blockchain transactions than proof-of-work models.

Why Is Ethereum Updating?

Switching to a proof-of-stake model makes sense for multiple reasons. For one thing, it’s less energy intensive and therefore addresses the concern that cryptocurrency is bad for the environment.

Second, proof of stake is newer, seen as more advanced, and is more widely accepted by the industry, says Derek Yoo, CEO and founder of Moonbeam, a new smart contract chain that’s compatible with Ethereum: “I don’t think there’s much debate anymore of what’s better and what the direction should be,” he says. “Anything new these days is proof of stake.”

When Will the Ethereum Update Take Place?

There are a few key milestones throughout Ethereum’s transition process.

First, the original Ethereum Mainnet (the proof-of-work model) which currently runs parallel to the Ethereum Beacon Chain will merge with the new proof-of-stake model that was developed in late 2020. 

“Mainnet Ethereum will merge with Beacon Chain, allowing the entire network to be more energy-efficient and allow for staking,” says Aguilar. 

The Merge Phase 1 is targeted for the third quarter of 2022. Ethereum core developer Tim Beiko wrote in a tweet this transition will likely happen in the “few months after” June.

Ethereum will then implement the larger rollout in baby steps during 2023, with smaller shard chains deployed over time. “Sharding is the process of breaking up large data into smaller pieces to allow the network to process at faster speeds without congesting the network,” explains Aguilar.

What Does the Future Hold for Ethereum? 

The upgrade will likely lead to a decrease in new ETH supply, and interest in the Ethereum blockchain could increase based on the amount of ETH ready to stake. 

The decrease in supply is a positive for most Ethereum investors, said Christine Kim, a research analyst at Galaxy Digital, on FirstMover. “Supply should contract rather than expand over time. And so I think that’s a huge boost to Ethereum’s investment narrative as a store of value and as a hedge against inflation,” Kim said. 

DeFi investors appear eager for the merge to be complete. There is now reportedly at least $31 billion worth of ETH deposited in the new Ethereum Consensus Model staking mechanism, ready to validate new transactions as soon as the light is green.

High-profile crypto professionals are predicting an ETH bull run to as high as $10,000 in 2022, while billionaire Mark Cuban has been quoted saying he’s bullish on Ethereum’s upcoming merge. The signs are all there for the Ethereum blockchain to maintain its status as the leading smart contract blockchain and possibly become the new leader in cryptocurrency — but of course, a lot of work must be done by Ethereum’s developers until then.