Key Factors behind crypto crash
Ethereum (ETH), the second largest cryptocurrency in market capital, has been experiencing a hard time over the last month. Now that the active price of Ethereum (ETH) has dropped by 44% from its yearly profits in just four months. Many are asking what exactly is going on with this one-stop-performer token.
On September 7, Ethereum was down almost 4% on the day and more than 10.5% there for that month.
The causes are complex, of course there is the macro-economic pressure and less demand from institutions but also family finances, low margins being squeezed further by rising market rents or property prices.
Economical Landscape: U.S. Employment Data
One big catalyst for the recent Ethereum selloff has been weakness in broader markets on positive U.S. nonfarm payrolls data earlier this week, one trader told CoinDesk. The numbers, released Sept. 6, said that job growth in August was only at 142,000, well off the forecasted rate of 164,000 prior to their release. At first glance, this seems unrelated to cryptocurrency. But the poor read on economic health has reverberated through all markets—including crypto.
If the job market continues to cool, it could create fears of slower economic growth that will trigger investors fleeing into safer assets at worst and more likely sell off in volatile segments like digital currency.
Together, these macroeconomic signals have landed Ethereum in a 4% loss on Sept. 7, and the then dashing crypto world is following every step of its way down. Adding to the negative sentiment is decreased confidence in the U.S. economy, which is making traders more cautious (therefore not buying equivalent riskier assets like Ether).
Grayscale Ethereum Outflow Effect
Large institutional outflows like (Grayscale) from Ether ETFs are also availing to the current suffer for Ethereum (ETH). These outflows are basically driven by Grayscale, who is a top-class player in the cryptocurrency investment field. Spot Ethereum ETFs had $111 million in liquidations during the first week of September. The trail followed behind two significant outflow events on Sept. 3 and 4, which saw Grayscale moving $52.3 million and $4.06 million worth of funds, respectively.
It just goes to show that institutions have almost no confidence in Ethereum ETFs. And at the same time zero inflows to Ethereum funds, $4.9 million and $4.7 million, respectively from Fidelity & Blackrock on Sept 7th. The absence of demand has even led some large investing firms to rethink their Ethereum-type products.
WisdomTree pulled its Ethereum Trust S-1 registration and VanEck abandoned ETH futures ETF, vanishing the offering due to factors like inadequate liquidity, below-average performance and declining investor appetite.
Future Traders Are Doubling Down on Short Positions
In addition to this, institutions are reducing their exposure to Ethereum and the futures traders have grown quite bearish as well. Ethereum OI (Open Interest) has increased by 12% in the month of September, all while its funding rate continues to decline further. The fact that, for a long time now, there has been an inverse relationship between OI and price would suggest traders are shorting Ethereum as those hoping for further downside continue to stack their bets.
OI at these levels is the highest it has been since August 27, but Ethereum was worth some $2,500 then. The ongoing decline—Ethereum is now well below that high — suggests a more bearish mindset from the market. This further adds strength to the decline, as more traders are coming in evidently with such a sell-side push.
Declining Ethereum Market Liquidity
A major factor behind Ethereum’s recent slump is a fall in market liquidity. Ethereum’s 5% market depth on centralized exchanges has reportedly fallen dramatically since June 2014, as per data provided by digital asset data provider CCdata. Market order depth is the capacity to trade an asset without a severe impact on its price, and falling market orders deplete liquidity in favor of slippage.
This comes in contrast to the initial expectation of spot ETFs for Ethereum as a means to improve liquidity. This has made it harder for traders to execute block trades without moving the price, and in doing so has helped encourage downward momentum.
Retail Investors Are Losing Interest
Meanwhile, retail demand for Ethereum has fallen as well. Over the past 30 days, centralized exchanges had a negative net flow of $856 million.
The vast reduction in buying pressure from the retail crowd has played a massive role in Ethereum’s inability to regain its edge. Ethereum will struggle to make higher ground unless it interests retail traders again.
The Path Forward: Can Ethereum Bounce Back?
There are a number of things that need to be done for Ethereum in order to return its bullish steam. The official economic conditions and the macroeconomic situation should be stable, to then give an impetus for speculators who believe that it is now time to invest in risky assets (for example, bitcoins).
The second-stopping block coming up will be the return of institutional demand, which could come with updates from the Ethereum ecosystem, especially around its upgrade to ETH 2.0, etc. Finally, liquidity has to return and retail investors have got a role for the market too.
Overall, the ever recent price fall on Ethereum is due to a couple of factors, including poor macroeconomic data, institutional sell-offs in gigantic amounts and future traders shorting very aggressively, leading into it all with liquidity running lower over retail interest. The actual reality is that Ethereum has fought through these hardships before, but if this continues to be the case into 2024, then it could barely chart a more negative course. It remains to be seen whether Ethereum can recover from this latest blow or not.
