Cryptocurrency markets on Wednesday took stock of sharp losses caused by heightened expectations of tighter US monetary policy and braced for a possible test ahead of the Ethereum blockchain upgrade.

As of 6:15 a.m. in London, bitcoin was worth about $20,000 after falling nearly 10% the day before. Ether, Ethereum’s native token, has struggled to hold above $1,600. Stocks, bonds and digital tokens fell on Tuesday after hot US inflation data pointed to another big interest rate hike by the Federal Reserve.

The Fed has no choice but to “hit the brakes, tighten financial conditions, raise real yields, and that will just make risk assets worse,” Charlie McElligott, macro strategist at Nomura Securities International Inc., told Bloomberg Television. .

Such macroeconomic factors are currently overshadowing Ethereum’s overhaul, known as the Merge. But an upgrade aimed at reducing the blockchain’s energy consumption is due to take place on Wednesday or Thursday evening and will once again be in the spotlight.

Many financial services are built on top of Ethereum, making it a critical crypto highway, so any trickery in software transitioning from the so-called proof-of-work to proof-of-stake paradigm could affect digital assets.

“There’s been so much testing that the merge itself is likely to be very smooth,” Ethereum co-founder Joseph Lubin said on Bloomberg Television, drawing a comparison to the overnight iPhone update. Major Ethereum-based services are ready for the upgrade, but some smaller ones may need more work, he added.

Ether’s rally since mid-June, fueled in part by the hype surrounding Merge, has recently cooled. Both Ether and Bitcoin have more than halved in 2022.

Mark Newton, head of technical strategy at Fundstrat, wrote in a note on Tuesday that bitcoin could fall below $18,000 before prices bottom out in October.

© 2022 Bloomberg

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