Ethereum
Can Ethereum Reclaim $4,000? Fragile fundamentals threaten to cause ETH to crash
Ethereum performed disappointingly for its investors in recent weeks, raising concerns about whether the second-largest cryptocurrency by market capitalization has lost its luster. The cryptocurrency continues to bypass the $3,100 level, without crossing any significant upside. This indicates weak fundamentals that could trigger a price decline.
Ethereum fails to take meaningful action
Markus Thielen, head of research at 10x Research, highlighted some worrying developments regarding the Ethereum Price. In a new report shared with NewsBTC, he explains that although Ethereum remains highly correlated to Bitcoin with an R-Square of 95%, it continues to perform poorly as the latter has reached new all-time highs.
Thielen recalls ETH’s performance during the last bull market, which was closely linked to new sectors coming out of the network, such as decentralized finance (DeFi) and non-fungible tokens (NFT). This caused demand to skyrocket and, in turn, the price followed as users gobbled up ETH for the high gas fees required to transact on the blockchain.
However, Ethereum failed to maintain this momentum, which can be attributed to its inability to deliver the upgrades users needed on time. Thielen explains that the Dencun upgrade which helped solve the problems of high gas fees had come three years too late, because by 2024, when the upgrade arrived, users had moved to layer 2 networks. Additionally, during this period, many Other layer 1 networks have seen an increase in users and Solana is one example.
Source: 10x Research
The researcher further explained that the weak fundamentals of ETH are now not only affecting its price, but have also had a ripple effect on Bitcoin. “Ethereum’s weak fundamentals become an obstacle for Bitcoin because they prevent a large influx of fiat currency into the crypto ecosystem,” Thielen said.
Better to short ETH
Thielen’s analysis of Ethereum also extends to the decline in stablecoin usage on the network. In 2021, Ethereum dominated stablecoins such as USDT and USDC. However, it seems that, among other things, high fees have pushed users to other networks. Blockchains such as Tron (TRX) now dominate stablecoin transactions, leaving ETH in the dust.
Additionally, there is also the fact that the issuance of ETH is becoming inflationary again. After the London hard forkalso known as EIP-1559, was completed in 2021, the network saw its broadcast become deflationary for the first time as ETH burned quickly overtook the circulation of ETH.
However, this has changed over the past few months, as there has been more ETH issued than ETH burned, notes Thielen. To put this into perspective, a total of 74,000 ETH was issued, compared to only 43,000 ETH burned. This inflation, coupled with the fact that staking rewards have now fallen to 3%, below the 5.1% offered by Treasury yields, Ethereum has struggled to maintain bullish sentiment.
Given these developments, the researcher believes that it is better to be bearish on Ethereum right away. “At this time, we would be more comfortable holding a short position in ETH than a long position in BTC, as the fundamentals of Ethereum are fragile, which is not yet reflected in the price of ETH,” concludes Thielen.
ETH price fails to hold $3,100 | Source: ETHUSD on Tradingview.com
Featured image from Watcher Guru, chart from Tradingview.com
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