Static on the ether: why Ethereum is falling

Since ETH ETFs began trading on July 23, 2024, the second-largest cryptocurrency has slumped by more than 31%.

While bitcoin retains its reputation as digital gold suited to HODLing, Ethereum is used more for paying transaction fees and interacting with smart contracts and DeFi applications.

“Buterin’s coin” also generates income via staking and other passive strategies such as lending on money-market protocols. Yet its broader utility than bitcoin brings complications of its own.

Oleg Cash Coin examines why ETH is falling despite some experts’ expectations.

Ethereum’s economics

Although Ethereum began to lag bitcoin in price around the time the ETH ETF was approved in America, the second-largest cryptocurrency’s economic dynamics shifted after the Dencun upgrade in March 2024.

The hard fork introduced significant changes aimed at scaling the network by creating a new type of transaction for large amounts of binary data. The updates cut transaction costs on layer-2 networks such as Optimism, Arbitrum, Base and zkSync.

Fees fell by an order of magnitude or more, easing the load on Ethereum but also reducing revenues for mainnet validators and L2 operators. Users pay less ETH, and that is a key component of network participants’ income.

After the hard fork, combined daily revenues on Base, Optimism, Arbitrum, Scroll, zkSync and Zora amount to $60,000–$200,000. Throughout 2023 and part of 2024 these figures rarely fell below $500,000; at the March 2024 peak they exceeded $2m a day.

Daily revenues on Ethereum’s mainnet also collapsed. At the peak in March 2024 the figure topped $30m, whereas in August and early September it fell to roughly $400,000 a day.

One might assume Ethereum has lost users and that active customers have dwindled. But Etherscan and Token Terminal show relatively stable numbers both on the main chain (0.4m–0.5m active addresses a day) and on L2s (around 2m).

Inflation dynamics

The Ethereum network shows relatively steady usage alongside lower transaction costs.

The one thing that has clearly worsened is ETH debasement. Since The Merge, when ether moved to Proof-of-Stake, the inflation curve has, for the first time after Dencun, turned higher.

Every Ethereum transaction includes a portion of coins that is burned irreversibly, allowing the currency to become deflationary when transaction activity is high.

This mechanism was introduced in 2021 with the London upgrade. Since then, ETH in circulation can both increase and decrease depending on transaction volumes and fee levels.

At the time of writing, Ethereum’s 30‑day inflation is about 0.7% annualised (69,000 ETH, or ~$162m). For comparison, over the same period about 13,980 BTC (~$780m) were created on the bitcoin network, implying inflation of roughly 0.8% annualised.

Although the community is worried—and some have even suggested raising fees again—stable network usage leaves room for more positive scenarios.

Validators and staking

Since late August, the amount of ETH in staking has risen by 198,000 ETH. According to Metrika, ETH deposit inflows exceed withdrawals by roughly 1.5 times, effectively offsetting all inflation over the past 30 days.

Despite the price decline, interest in staking the second‑largest cryptocurrency remains high. As of early September, the network runs almost 1,070,000 validators, and the total amount of ETH locked in staking exceeds 34,200,000 ETH.

Deposit activity remains brisk and well above pre‑2023 levels, roughly in line with most of 2023. Net inflows are around 200,000 ETH per week, though there has been a slight drop since March 2024.

It is also notable that a large share of stakers (about 70%) “entered” at prices below $2300 per coin. That suggests the pain threshold for most validators has not yet been reached. Moreover, around 20m ETH were locked when prices were below $1900.

Macroeconomics

ETH’s decline may reflect a broader shift of interest to other cryptocurrencies. The trend of ether’s shrinking share of the crypto market has persisted for a second year.

From June 2023 to early September 2024 ETH’s share fell from 20% to 14.6%. Over the same period bitcoin’s dominance rose from 48% to 56%, and SOL’s from 0.6% to 3%.

Dominance, however, is only a macro gauge, suggesting ETH is no different from other altcoins, which steadily trail the first cryptocurrency.

More important, crypto has become more correlated with traditional indices such as the S&P 500 and Nasdaq.

This suggests markets treat cryptocurrencies as risk assets whose levels and momentum depend heavily on US monetary policy. When traders and investors start to anticipate a “pivot” by the Fed, they hedge their positions.

This is a temporary phenomenon tied to short‑term moves in risk assets, ETH included. Why ether fell more than other top altcoins remains an open question, though the reasons may be quite prosaic.

Cascades of liquidations

August 2024 was one of the biggest months on record for liquidations in DeFi applications. Over the last month of summer, traders lost more than $436m that sat as collateral in lending protocols such as Aave. Only May 2021 saw larger monthly losses.

The bulk of liquidations fell on August 5th, when not only Ethereum but the entire market shed tens of percent in a day.

Given ether is the largest collateral asset in decentralised‑finance applications, the sharp early‑August drop could have triggered a cascade of liquidations, weighing on ETH’s price.

The episode resembles a so‑called long squeeze (the opposite of a short squeeze), when a price drop is driven by an excess build‑up of collateralised (credit, margin) long positions whose closure creates extra selling pressure and pushes the price lower.

Conclusions

Ether probably fell more than others not for economic or macro reasons but for speculative ones. The debt‑laden nature of Ethereum’s ecosystem, which attempts to copy traditional financial mechanisms, may have sparked turbulence and panic, adding extra pressure on ETH.