Possible Regulatory Changes Could Threaten an Ethereum Comeback

As recently as July 20, it seemed as if cryptos were to remain stuck in a rut. But in the past two weeks, this asset class has started to make a comeback. Ethereum (CCC:ETH-USD) itself is up nearly 50% during this time frame. The question now is whether the recent rebound has runway, or if it is only a “dead cat bounce.”

Ethereum
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Retail investor excitement isn’t anywhere near where it was just before the May meltdown. But there is a factor that could help fuel a further recovery in the price of Bitcoin (CCC:BTC-USD), ETH, as well as the scores of possible “Ethereum killers,” like Cardano (CCC:ADA-USD) that have risen in popularity this year.

What’s this factor? The across-the-board upgrades major blockchains (including this one) are in the process of launching. Leveling up their speed, scalability and DeFi (decentralized finance) capabilities, upgrades may help again convince investors that crypto could still disrupt traditional finance.

Yet it’s not guaranteed that my “upgrades fuel a rebound” thesis plays out. There are reasons why after its recent climb, this coin will at best make more gradual leaps from here in the coming months. There’s also a big risk that could sink the hopes of a crypto market recovery. So what’s the best way to approach ETH today? With the market only now absorbing the latest (possibly negative) development, it may be best to wait-and-see for now.

Ethereum, its Upgrades, and What’s Next for its Coin Price

Ethereum’s London hard fork has gone live. This puts it one step closer to completing its much-anticipated “2.0” upgrades. What’s so important about this upgrade? It result in faster transaction speeds and prepares the network for the move from proof of work to proof of stake.

Transaction fees (aka “gas fees”) will come down as well. These improvements will enable it to regain some lost ground. DeFi participants such as dApps (decentralized applications) developers have this year been moving to so-called “Ethereum killers” due to these issues.

These improvements and those under way for Bitcoin, Cardano and other major coins, might help to sustain the crypto rebound that kicked off a couple weeks back, or they might fail to. Again, there are factors that could prevent the 2.0 upgrades failing from moving the needle.

Worse yet, there’s something that could put the crypto market at-large back into “bear market mode.” As of this writing, it’s too early to tell to what extent this factor could impact the blockchain space going forward.

Coin-Specific and Market-Wide Risks

It’s no slam dunk that Ethereum’s set to make its way back to $3,000 — or perhaps $4,000 — per coin. Coin-specific factors could minimize its upside from here. A market-wide risk could even result in it starting to sink back toward its lows.

First, the issues that pertain directly to Ethereum: a Cointelegraph commentator recently detailed why the coin’s recent rally could soon lose steam. While the biggest risk, a potential delay in the London launch, did not come to pass, there are other risks. As I’ve pointed out before, some have questioned whether the upgrades will even provide the intended benefits (faster speeds, lower transaction fees).

Second is the risk of another market-wide pullback. Cryptos may seem like they are on their way to recovery. But provisions in the U.S. Senate’s infrastructure bill (if passed) could stop it in its tracks. What kind of provisions? Tax-related ones. Specifically, the provisions change the definition of “broker” for reporting purposes when it comes to crypto.

Lawmakers want to use increased revenue that comes from better reporting of crypto transactions to help pay for the bill. What’s the problem, as crypto capital gains are already taxable for U.S. investors? It could have disastrous effects for the blockchain economy. The anonymous nature of crypto will make it difficult for participants like miners to meet compliance. As crypto attorney Jake Chervinsky put it, “in practice, this could mean a de facto ban on mining in the USA.”

When it Comes to Ethereum, Sit Tight for Now

The critiques of the forthcoming 2.0 upgrades may be a case of splitting hairs. But the risks that come from the infrastructure bill’s crypto reporting requirements may have some bite to them. Besides harming the crypto mining space (more a problem for Bitcoin), the fact it takes away many of crypto’s privacy advantages may lessen the chances that DeFi ever moves beyond its current niche status and reaches critical mass.

The “upgrades fueling a further rebound” thesis still has a shot of playing out. But for now, it may be best to wait for markets to absorb the specter of increased regulatory compliance before buying Ethereum.

On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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