Ethereum is under intense pressure as a combination of macroeconomic turbulence, capitulation by investors, and soaring derivative activity suggests carried downside risk.
In the last few days alone, holders of Ethereum have realized losses in excess of half a billion dollars — a reflection, of course, not just of the price action over the last few days but also of the underlying investor sentiment that has driven Ethereum’s price down. This latest price drop seems to have sparked the kind of market panic that tends to drive prices even lower.
The larger crypto market is being pulled down by global macro concerns, with recent events in China’s trade policies and a general move to risk-off behavior in traditional markets affecting sentiment. Ethereum, as the second-largest crypto by market cap, is stuck in the crossfire of both internal weakness and external economic uncertainty.
Capitulation or Calm Before the Storm?
By analyzing data from the blockchain, we can see that recent sell-offs have hit Ethereum investors particularly hard. From the start of 2023, the price of Ethereum had been on quite the uptrend, reaching the $2,000 level. Then in mid-August, it suffered a collapse, losing almost half its value in just under three months, down to around $1,080 by the start of November. In these last three months of the year, the on-chain net realized loss stood at $564 million.
The realized-loss rate seems to be slowing down, which at first glance might be interpreted as a shift that is more positive than negative. Yet, this is not a clear-cut win. It could just as easily be read as a sign that traders and long-term holders have fully internalized the new, low-for-now price points and are no longer counting on a quick recovery. If that’s the case, the appearance of fewer losses may well precede a longer stretch of price stagnation or further downside.
The present situation is even more worrisome because of the recent increase in ETH moving to derivative exchanges. On-chain stats show that over 77,000 ETH — worth hundreds of millions of dollars — was sent to derivatives platforms in a single day. This was easily the largest inflow in months.
This kind of movement often comes before an uptick in speculative activity, especially short selling. When traders want to short an asset, they typically move it to a derivative exchange to open a leveraged position or hedge against further downturns. Ethereum has seen inflow spikes two times prior this year — on March 26 and April 3. On both occasions, it followed up with steep price declines within days.
ETF Outflows Add More Pressure
A continuous negative flow of capital from spot ETFs is yet another bearish factor for Ethereum. The latest ETF to provide spot exposure to Ethereum is now six days into a stretch of pretty substantial net outflows, to the tune of just over $14 million. Not only is the six-day trend somewhat worrisome for any ETF, let alone an Ethereum one, it’s also taking place in the context of an overall positive flows narrative for not just Bitcoin ETFs, but also for digital assets more generally.
In contrast to trading conducted by individual retail investors, when exchange-traded funds are bought and sold, it tends to be done in a more methodical and deliberate manner. That is because inflows and outflows of capital into and out of ETFs—such as the Grayscale Ethereum Trust (ETHE) or Bitwise 10 Crypto Index Fund (BITW)—usually result from portfolio rebalancing decisions made by large institutional investors and not from the kind of day-to-day retail trading that you see in a more bull or bear speculative market.
Risk-Off Environment Adds to Bearish Narrative
The macroeconomic scene is stacking more problems atop Ethereum because of developments in the world beyond crypto. As geopolitical strains have sharpened, new pushback from China has added to the generally anti-risk sentiment. Equities are waning, commodities are cutting capers, and investors have taken to rotating out of very high-risk assets, which is code for Ethereum and its fellow cryptos.
This setting is such that even projects with strong fundamentals can suffer because liquidity is drying up and sentiment is turning defensive. The correlation of Ethereum with tech stocks and other growth-oriented assets makes it particularly vulnerable when the seek-for-safety dynamic in global capital really kicks in.
Looking Ahead
Everything points to a very important moment for Ethereum. The combination of realized losses, huge inflows to derivative exchanges, outflows from ETFs, and macroeconomic uncertainty paints a pretty cautious picture. And while capitulation, with reduced losses, can sometimes set the stage for a rebound, the technical and behavioral data suggest that, rather than going up from here, Ethereum could be on the verge of going down even more.
It is imperative that investors and traders watch key support levels, funding rates on derivative platforms, and ETF flow trends like hawks. If these measures keep deteriorating, they could very well be leading Ethereum into another steep correction in the not-too-distant future.
Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.
Follow us on Twitter @themerklehash to stay updated with the latest Crypto, NFT, AI, Cybersecurity, and Metaverse news!
