Is now the time to buy Ethereum after The Merge?

The highly anticipated upgrade might boost this cryptocurrency's long-term prospects.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

The Federal Reserve's aggressive monetary stance in 2022 has caused investors to reassess their appetite for risk, leading to a plunge in the most speculative assets out there, a category that cryptocurrencies undoubtedly belong in. 

Even the second-biggest cryptocurrency by market cap, Ethereum (CRYPTO: ETH), hasn't been immune to the general market's weakness. The popular crypto is down 64% this year (as of this writing), but a recent catalyst could drive investor interest to new heights. 

With The Merge now complete, is this a good time to buy Ethereum? Let's take a closer look. 

Changing the consensus mechanism 

For its entire history (up until a couple of weeks ago), Ethereum operated what is called a proof-of-work (PoW) system. This requires so-called miners to use massive amounts of electricity to power computers to solve complex math problems, earning the right to validate new transactions on the blockchain. Bitcoin, the world's most valuable cryptocurrency, operates with PoW. 

Detractors point to the fact that PoW is energy-intensive and not really scalable. Bitcoin uses the same amount of energy as a small country. Furthermore, it can only process three transactions per second (TPS). 

As a result of these perceived limitations, developers have transitioned Ethereum to run on a proof-of-stake (PoS) consensus mechanism. PoS allows token owners to lock up, or stake, their ether tokens to help validate new transactions and secure the network. Moving to proof-of-stake was seven years in the making, so its long-awaited completion demonstrates exactly how complex and groundbreaking the move was. 

According to its official website, Ethereum's energy use has now been cut by 99.95%, a statistic that is sure to please environmentalists in both the government and the crypto community. Additionally, moving to PoS paves the way for Ethereum's network to implement sharding in 2023, an update that will split and distribute the network load across side blockchains. Think of it like adding more lanes to a highway. The result is a huge potential increase in throughput to the tune of 100,000 TPS. 

However, a valid argument can now be made that PoS makes Ethereum's network more centralized, as it is estimated that 43% of all staked Ethereum is held by two entities right now -- crypto exchange Coinbase and Lido DAO, a decentralized staking solution designed for Ethereum. This could lead to problems down the road that are at odds with the core tenet of decentralization that blockchain technology promises. For example, Coinbase and Lido could have undue influence over Ethereum in the future, affecting things like transaction approvals and governance strategies. 

Nonetheless, Ethereum is now in a position to scale better thanks to its switch to PoS. And this could lead to even greater adoption with the continued popularity of decentralized applications such as decentralized finance (DeFi) protocols and non-fungible tokens

Investors should weigh the options 

Of the cryptocurrency networks out there that incorporate smart contracts, Ethereum is the most attractive for investors because of its deep developer ecosystem. According to venture capital firm Electric Capital, Ethereum had the most developers working on it at the start of the year. And with sharding on the horizon in 2023, it's not hard to see even more developers flocking to work on advancing Ethereum. 

Other popular cryptos that have already been operating a PoS system are Cardano and Solana. Both of these have their own special characteristics that investors could find appealing. Cardano is known for having a deliberate, calculated, and research-based development process. And Solana, with the theoretical capacity to process 50,000 TPS, could disrupt the payments industry. 

Therefore, investors are presented with the option of buying a basket of these interesting cryptocurrencies, all with their own unique attributes and potential use cases, or perhaps putting their entire crypto allocation into Ethereum. Experts believe that it's too early to tell what the exact implications of The Merge will be, but it certainly could prove to be a long-term catalyst that drives the price of Ethereum higher over time. 

With Ethereum's price down 25% over the past couple of weeks, investors who have been on the sidelines might want to jump in and buy some of this top cryptocurrency. 

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Neil Patel has positions in Coinbase Global, Inc. and Ethereum.  The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin, Coinbase Global, Inc., Ethereum, Lido DAO, and Solana. The Motley Fool Australia has positions in and has recommended Bitcoin, Coinbase Global, Inc., Ethereum and Solana. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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