[TL; DR]
During the past two months Ether has been facing strong bearish pressure.
solana-sol" target="_blank" class="blog_inner_link">Solana, SUI and aptos-apt" target="_blank" class="blog_inner_link">Aptos are examples of layer-1 blockchains that compete with ethereum-eth" target="_blank" class="blog_inner_link">Ethereum.
The recurring ETH ETF net outflows have contributed to the decline of Ether investor confidence.
Introduction
Although cryptocurrencies performed well during the first half of the year such a momentum is missing this time around. Even the leading digital currencies like Ether and bitcoin-btc" target="_blank" class="blog_inner_link">bitcoin are underperforming. Despite some market wide factors such as the economic environment affecting their performances some digital currencies have internal challenges. For example, several factors are limiting ETH’s market performance.
Ethereum Market Performance: Causes of Recent Downtrend in ETH Price
According to VanEck ETH underperformance is evident in the market. In terms of market performance it is ranked 13th among the 22 leading layer-1 blockchains. The blockchain had a yearly return of 62% compared to bitcoin’s 138%. During the same period Solana had a return of 624%. Similarly, during the last 90 days Ethereum performed lowly as well. For example, ETH (-30%), ranked number 12, was outperformed by TRX (+37%), bnb-bnb" target="_blank" class="blog_inner_link">BNB (-5%) and TON (-3%).
No doubt, ETH has experienced a rough period since its price has been constantly falling. For example, during the 24 hour period that stretched between 3 and 4 September the coin dropped by 5.2%. As a result of the high bearish pressure it has been facing, it lost by 8.1% within the last 30 days. The following price chart shows how badly ETH performed during the past 30 days. ETH Monthly Price Chart - CoinGecko
As observed on the graph, the ETH price has been declining since 25 August. Even before that date it has been in a bearish period. Although on 25 August ETH was trading at $2,776 it is currently priced at $2,420. Several factors have been contributing to its bearish outlook.
Uncertainties about United States Interest Rates Cut: For the past few months there has been uncertainty about the Federal Reserve’s final decision on interest rates cut. The Fed is expected to adjust interest rates in September. Now that the changes in the non-farm payrolls were below expectations it’s not clear how the Federal Reserve will adjust the rates. An expansionary monetary policy would be best for the crypto sector. However, due to the fear of a recession the investors may shift their funds from the crypto sector to safer investments such as shares and bonds. Therefore, the uncertainty about the Fed’s changes in monetary policy led to a depressed crypto market.
Declining Network Fees: The Ethereum revenue has been declining due to the performance of layer-2 blockchains. These networks are squeezing revenue from the Ethereum ecosystem. Due to such developments the Ethereum network fees have decreased by 99% since the launch of Dencun upgrade in March. That upgrade which reduced network fees for layer-2 blockchains led to a rise in the number of Ethereum layer-2 networks.
The resultant high number of layer-2 solutions has contributed to the fall in the Ethereum network fees. This is because there has been a reduction in activity on Ethereum’s base layer. As an example, on 31 August the Ethereum network fees fell to the lowest level within four years. The reason for this situation is the poor Ethereum’s compensation model that benefits layer-2 solutions at the expense of the base network. An analyst, Cygaar, is one of the individuals that have criticised the Ethereum compensation model. Criticism of Ethereum Compensation Model: x.com/Cgaar
Also, VanEck commented on this. Posting on its blog it said, “Quantifying Ethereum’s loss of its pole position among blockchains, since 2022, the share of all blockchain fees received by Ethereum has fallen from 86% to 33%, while its share of DEX volume has declined from 42% to 29%.”
It added, “Ethereum’s solution to improve its scalability, pushing transactions to L2 blockchains, has thus far failed to drive value to ETH. Not only do the L2 blockchains increasingly cut into Ethereum economics through multiple pathways, but they also offer a suboptimal user experience while still offering far less transaction throughput than Ethereum competitors.”
Outstanding Performance by Layer-1 Blockchains
The other reason that has contributed to ETH underperformance is the outstanding performance by the other layer 1 networks. There is a high tendency for digital asset users to dump the Ether crypto market for layer-1 networks with higher-throughput such as Solana. As a fact, layer-1 blockchains such as Solana, Aptos and Sui are able to process thousands of transactions per second. Apart from the general network users, developers prefer blockchains with higher- throughput to Ethereum. This decrease in the demand for Ethereum products has led to the fall of the Ethereum price.
Read also: 10 Layer 2 Crypto Projects to Watch in 2024
Commenting on this VanEck said, “These chains apply advancements in distributed systems technology to handle more transaction throughput and faster transaction processing. While Ethereum can process ~15 TPS p3er second with transaction confirmation times measured in minutes, chains like Solana, Sui, and Aptos can process thousands per second with confirmation latency measured in seconds.”
It continued, “As a result, the user experience for Ethereum’s traders is clunky, and the number of individuals who can utilize Ethereum is limited. Because of Ethereum’s bottlenecks, developers building novel applications are increasingly deploying their projects to chains that can accommodate a better user experience and more users.”
Ethereum ETF Underperformance
When investors celebrated the launch of Ethereum spot ETFs they never anticipated that they might negatively affect the ETH price. This is because the launch of ETH ETFs has brought Ether in direct competition with lucrative stocks that have better technology. For example, since January ETH has gained by about 0.98% while some stocks have had better returns. To illustrate, since January Nvidia and Meta have gained by 122.57% and 49.26%, respectively. Thus, the tech stock bubble has resulted in much competition for ETH.
Similarly, ETH ETFs have resulted in a negative ETH investor sentiment which has increased Ethereum challenges. The low spot ETH inflows have reduced investor confidence in both ETH and the ETFs. As a result, those interested in investing in crypto ETFs are opting for bitcoin spot exchange traded funds since they have high capital inflows from time to time. Unfortunately, since their launch ETH ETFs have been experiencing much net outflows. As an example, on 12 September alone there were net outflows of $20.14 million, leading to a cumulative net outflow of $582.74 million.
Read also: Bitcoin and Ethereum Show Modest Gains, Spot ETF Outflows Continue Ethereum negative flow-flow" target="_blank" class="blog_inner_link">flow: Sosovalue
The trend in the Ether ETF sector can be seen replicating in the Ether crypto market. And generally, there has been a decline in institutional interest in Ethereum products.
Low Staking Rewards: Based on the current market analysis the low Ethereum staking rewards are also contributing to the decline in the demand for ETH. Although the average ETH staking reward is 3.2% there is also an annualized inflation rate of around 0.7%. This means an ETH investor who stakes ETH will receive a net return of less than 3%. As a result, the reward from ETH staking is far less than the yield from US government bonds. Thus, the investors who are informed about the differences in yield of various investment assets would rather put their funds in government bonds rather than ETH staking. This has led to a fall in the demand for ETH which has ultimately created bearish pressure.
Rising Competition from New Tokens: The cryptocurrency investment scenario is changing rapidly. For instance, there are many new tokens that are introduced on the market periodically. These are leading to the decrease in market shares of existing cryptocurrencies such as ETH. For example, there has been a rise in the number of meme coins on the market. Since some of these are generating high returns due to the support they have from their large communities many people opt to invest in them instead of the pioneering cryptocurrencies like ETH and bitcoin.
In respect of this, VanEck said, “At the same time, many tokens have been launched that currently, or in the future, cleave value from Ethereum’s ecosystem. These include L2, Data availability, re-staking, and staking tokens. Each of these product groups offers a competing service to Ethereum.”
It added, “As more projects launch tokens, there will be further competition in Ethereum’s service set, driving the price of Ethereum’s core services lower while offering competing investment opportunities. This pricing pressure may shrink the economic pie available to ETH holders while increasing competition for investor interest.”
Conclusion
Ether has not been performing as the market expects since it is the second largest digital currency in the crypto market. Several factors are contributing to Ether underperformance. These include high competition from other layer-1 networks, uncertainty about U.S monetary policy and low staking rewards. Although there is nothing it can do about the external factors it should deal with its internal issues related to the layer-2 chains.