It’s fair to say that Ethereum‘s (ETH -3.37%) highly anticipated Merge — whereby the cryptocurrency migrated from the resources-draining proof-of-work mining protocol to the more efficient proof of stake — went fairly smoothly. The engineers nailed the process, but investors aren’t exactly celebrating right now.
The world’s second-most-valuable crypto initially sold off following the Merge. An investment losing value after a widely expected bullish event isn’t a surprise. The “buy the rumor, sell the news” adage is old hat to longtime traders. However, with Ethereum having plummeted 60% in value so far in 2022, it’s not as if we can say that there was a lot of bullish sentiment heading into the Merge. Sell the rumor, sell the news more?
If you think that holding Ethereum has been rough through this cruel bear market for digital currencies, it could be worse. You could’ve staked your Ethereum last year through Coinbase Global (COIN -4.18%).
A stake through the heart
The world’s most popular trading exchange for cryptocurrencies is a master of many things, but it seems to have fumbled the ball when it comes to its staking platform for Ethereum. Ahead of the Merge, Coinbase began promoting a way for customers holding Ethereum in their accounts to make some passive income — paid out in Ethereum — by allowing the trading exchange to stake on their behalf. Users would convert their crypto to Ethereum 2.0 in exchange for rewards as Coinbase participated in transaction validation (aka staking) on their behalf.
It was clear that traders were locking up their Ethereum in the process, unlike with most income-generating offerings, where investors can withdraw at any time. Participants were not able to trade, send, or sell their Ethereum 2.0. No one is arguing that folks weren’t aware that they were locking up their original Ethereum and handing Coinbase the key. The problem came when the goalposts started to move.
Coinbase initially expected to enable liquidity by the end of 2021, but as the year came to a close, new language pushed that milestone out to 2022. Unfortunately, this week’s migration to proof of stake isn’t the event that unlocks the staked crypto. It’s not until the next phase of the migration process — which Coinbase expects to take place in another six to 12 months — that Coinbase will allow withdrawals.
Coinbase did recently offer an escape plan, but it wasn’t exactly what traders were hoping to see. It is now allowing those with staked Ethereum 2.0 to swap it for a new wrapped Ethereum utility token being minted by Coinbase itself. It’s the only way out right now, but unfortunately it’s not a fair exchange. Ethereum was trading for $1,460 on Friday morning. The new wrapped Ethereum — cbETH — was fetching $1,382, a 5% discount.
Adding salt to the wound, the same program that was offering those willing to stake their Ethereum an initial annualized rewards rate of 6% in exchange for locking up their crypto is a lot lower. Staked Ethereum on Coinbase is now yielding just 3.77%. Traders were told that rates would change and could move lower, but it’s a cruel passing-ships moment, as liquid yields on more conservative income-generating banking vehicles have moved sharply higher in that time.
It could be worse, of course. We’ve seen a few platforms offering more generous rewards rates buckle this year. Coinbase is a survivor, backed by a cash-rich balance sheet to weather this crypto winter. However, you may want to check out the Coinbase page for Ethereum 2.0 and the wrapped cbETH. The reviews have been brutal, and it’s just a matter of time before Coinbase eliminates the feature where accounts can publicly post their thoughts. Coinbase does many things well, but the staked Ethereum system is certainly not one of them.
Rick Munarriz has positions in Ethereum. The Motley Fool has positions in and recommends Coinbase Global, Inc. and Ethereum. The Motley Fool has a disclosure policy.