The crypto market has a reputation for wiping a smile off your face as quickly as it puts one there. If you stay in the market long enough, you grow a thick skin and an anticipatory mindset that embodies open-mindedness, with the serene acknowledgment that anything can happen.
Quick Summary on Why ethereum is going down
- Ethereum is down 20% since the Merge on September 15th.
- The U.S. Feds increase interest rates by 75 basis points (0.75%), pumping the Federal funds rate to a 3.0 – 3.25% target range.
- Overall crypto market enters another cycle of a bear market based on previous market patterns.
- Market sentiment around possible hard fork, centralization, and loss in value of ETH compared to newly derived staked ETH (stETH) from staking pools causes mixed feelings among investors.
Source: Wikipedia | Vitalik Buterin (Ethereum’s founder)
The long anticipated Merge for the Ethereum blockchain to take off the clothes of Proof of Work and wear that of Proof of Stake has finally happened. But, the global financial market cut the celebratory party short as Ethereum plunges 18.5% just 3 days after the Merge and over 20% 10 days later. The reasons for this decline in price have been separated into two; the obvious and the speculative.
The Obvious One on why ethereum is going down
General Bear Market
To date, Bitcoin has largely dominated the crypto market, being the industry’s pioneer. The ripple effect of remaining at the top for too long and controlling a large percentage of the crypto market share is that other cryptocurrencies follow your lead (regardless of how big they’ve grown), including Ethereum. More like they can’t escape whatever happens to the Big boss.
Source: Trading View
Ethereum has dropped 72% since its all-time high(ATH) in 2021, moving from $4,867.81 to its current price of around $1343. This is also in sync with Bitcoin losing over 72% from its all-time high in 2021. However, panic isn’t set in for those with market understanding as it is common knowledge that bull and bear markets happen in cycles within the cryptocurrency market. Evaluating Bitcoin’s past bull runs, we see that in 2013, Bitcoin experienced a 5,507% increase, but 2014 saw it drop negative 58% from its ATH. 2015 and 2016 saw Bitcoin pump by 35% and 125%, respectively.
Source: Trading View
This four-year cycle repeated itself from 2017 through 2020.
- 2017 – +1,331%
- 2018 – -73%
- 2019 – +95%
- 2020 – +301%
Another cycle seems to have started with Bitcoin doing +66% in 2021 and currently at -58% for 2022. If history is something to follow, it is very much expected for Ethereum to experience a drop in price in this period even after a major successful event like the Merge.
It is worth noting that, although Ethereum is affected by the overall price movement of Bitcoin, they both increase in prices for different reasons. For example, Ethereum’s first bull run lasted from Oct. 2015 to Jan 2018, growing at a rate of 335,191% and hitting $1,400 due to its introduction of dApps, smart contracts, and DeFi that the market largely accepted.
It later plunged by 94% to $81 in Dec 2018, creating the first market cycle for Ethereum. Jan 2019 to April 2021 saw another bull run for Ethereum, helping it reach its ATH of $4,800. From April 2021 till now, Ethereum has dropped 73%, indicating that its bear market is still very much in play compared to its first market cycle.
Tougher Macroeconomic Environment
Another response to why Ethereum is plunging after the Merge is the proximity of the Merge to the U.S. Federal Reserve’s decision to increase the interest rate by 0.75% to douse the flame of the growing inflation in recent months. When interest rates are hiked, central banks swiftly reduce liquidity available to financial markets. This time, it’s not just the crypto market that takes the hit, but the broader stock market also.
Ethereum’s Merge only changes the mechanism through which it operates and sustains its security, not its nature (a risk asset). Therefore, it is still highly subjective to changes in economic factors like central bank rates and inflation.
Ethereum News : The Speculative
Market Sentiment
The crypto market is not just a market of facts and figures, it is also a market of emotions and thoughts. What one investor thinks and concludes affects his decision with his crypto assets. But, when many investors think and conclude in the same direction, it affects the market for the crypto asset as a whole.
Ethereum’s move to Proof of Stake also came along with concerns of centralization. This is duly justified as four crypto exchanges (Lido, Coinbase, Kraken, and Binance) control over 50% of the Stake in Ethereum’s POS network.
Source: Coindesk | Validator distribution
The problem is these exchanges are subject to regulation by the country from which they operate, pushing the second-largest cryptocurrency and largest decentralized ecosystem in the world within the grasp of the federal government (a really hated word in the decentralized world).
SEC chair Gary Gensler also made matters worse with his statement, “cryptocurrencies of the same nature as Ethereum could be reviewed and regulated as securities.” There are also concerns of protocol-level censorship, as in the case of Tornado Cash.
Is It Over For Ethereum? Does ethereum have a future?
Well, what do you think?
Will ethereum go up? Ethereum’s Beacon Chain Merge is just one box checked in a long queue of favorable structural upgrades to come in Ethereum’s roadmap. The current decline in price on Ethereum and other cryptocurrencies is not uniquely different from historical patterns. Therefore, nothing quite substantial proves that it is over for the stellar blockchain just yet.
Familiarity with market cycles helps you understand that “this too shall pass”, except the world ends before the next bull run. It is far from over for Ethereum as this move to Proof of Stake has been rumored to attract institutional investors – increasing the potential capital that could flow into Ethereum in the coming years.
There will always be concerns and market speculations, but if a product adequately solves a problem and there’s a healthy supply and demand, then it will do well and stay long in the market – and I think Ethereum fits this profile.
