{"id":16746,"date":"2024-09-06T14:00:00","date_gmt":"2024-09-06T11:00:00","guid":{"rendered":"https:\/\/forklog.com\/en\/static-on-the-ether-why-ethereum-is-falling\/"},"modified":"2024-09-06T14:00:00","modified_gmt":"2024-09-06T11:00:00","slug":"static-on-the-ether-why-ethereum-is-falling","status":"publish","type":"post","link":"https:\/\/forklog.com\/en\/static-on-the-ether-why-ethereum-is-falling\/","title":{"rendered":"Static on the ether: why Ethereum is falling"},"content":{"rendered":"

Since ETH ETFs<\/a> began trading on July 23, 2024, the second-largest cryptocurrency has slumped by more than 31%.<\/p>\n

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

\u201cButerin\u2019s coin\u201d 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.<\/p>\n

Oleg Cash Coin examines why ETH is falling despite some experts\u2019 expectations<\/a>.<\/p>\n

Ethereum\u2019s economics<\/h2>\n

Although Ethereum began to lag bitcoin in price around the time the ETH ETF was approved in America, the second-largest cryptocurrency\u2019s economic dynamics shifted after the Dencun<\/a> upgrade in March 2024.<\/p>\n

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.<\/p>\n

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\u2019 income.<\/p>\n

After the hard fork, combined daily revenues on Base, Optimism, Arbitrum, Scroll, zkSync and Zora amount to $60,000\u2013$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.<\/p>\n

\"\u041f\u043e\u043c\u0435\u0445\u0438
Data: The Block<\/a>.<\/figcaption><\/figure>\n

Daily revenues on Ethereum\u2019s mainnet also collapsed. At the peak in March 2024 the figure topped $30m, whereas in August and early September it fell<\/a> to roughly $400,000 a day.<\/p>\n

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\u20130.5m active addresses a day) and on L2s (around 2m).<\/p>\n

Inflation dynamics<\/h2>\n

The Ethereum network shows relatively steady usage alongside lower transaction costs.<\/p>\n

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.<\/p>\n

\"\u041f\u043e\u043c\u0435\u0445\u0438
Data: Ultra Sound Money<\/a>.<\/figcaption><\/figure>\n

Every Ethereum transaction includes a portion of coins that is burned irreversibly, allowing the currency to become deflationary when transaction activity is high.<\/p>\n

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.<\/p>\n

At the time of writing, Ethereum\u2019s 30\u2011day 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.<\/p>\n

Although the community is worried\u2014and some have even suggested raising fees again\u2014stable network usage leaves room for more positive scenarios.<\/p>\n

Validators and staking<\/h2>\n

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

\"\u041f\u043e\u043c\u0435\u0445\u0438
Data: Metrika.<\/figcaption><\/figure>\n

Despite the price decline, interest in staking the second\u2011largest 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.<\/p>\n

Deposit activity remains brisk and well above pre\u20112023 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.<\/p>\n

\"\u041f\u043e\u043c\u0435\u0445\u0438
Data: Dune<\/a>.<\/figcaption><\/figure>\n

It is also notable that a large share of stakers (about 70%) \u201centered\u201d 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.<\/p>\n

Macroeconomics<\/h2>\n

ETH\u2019s decline may reflect a broader shift of interest to other cryptocurrencies. The trend of ether\u2019s shrinking share of the crypto market has persisted for a second year.<\/p>\n

From June 2023 to early September 2024 ETH\u2019s share fell from 20% to 14.6%. Over the same period bitcoin\u2019s dominance rose from 48% to 56%, and SOL\u2019s from 0.6% to 3%.<\/p>\n

Dominance, however, is only a macro gauge, suggesting ETH is no different from other altcoins, which steadily trail<\/a> the first cryptocurrency.<\/p>\n

More important, crypto has become more correlated with traditional indices such as the S&P 500 and Nasdaq.<\/p>\n

\"\u041f\u043e\u043c\u0435\u0445\u0438
Bitcoin\u2019s correlation with the S&P 500. Data: The Block.<\/figcaption><\/figure>\n

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 \u201cpivot\u201d<\/a> by the Fed<\/span>, they hedge their positions.<\/p>\n

This is a temporary phenomenon tied to short\u2011term 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.<\/p>\n

Cascades of liquidations<\/h2>\n

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.<\/p>\n

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

\"\u041f\u043e\u043c\u0435\u0445\u0438
Data: TheBlock.<\/figcaption><\/figure>\n

Given ether is the largest collateral asset in decentralised\u2011finance applications, the sharp early\u2011August drop could have triggered a cascade of liquidations, weighing on ETH\u2019s price.<\/p>\n

The episode resembles a so\u2011called long squeeze (the opposite of a short squeeze), when a price drop is driven by an excess build\u2011up of collateralised (credit, margin) long positions whose closure creates extra selling pressure and pushes the price lower.<\/p>\n

Conclusions<\/strong><\/h2>\n

Ether probably fell more than others not for economic or macro reasons but for speculative ones. The debt\u2011laden nature of Ethereum\u2019s ecosystem, which attempts to copy traditional financial mechanisms, may have sparked turbulence and panic, adding extra pressure on ETH.<\/p>\n","protected":false},"excerpt":{"rendered":"

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. \u201cButerin\u2019s coin\u201d also generates income via staking and other passive […]<\/p>\n","protected":false},"author":1,"featured_media":16745,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"select":"","news_style_id":"","cryptorium_level":"","_short_excerpt_text":"","creation_source":"","_metatest_mainpost_news_update":false,"footnotes":""},"categories":[1144],"tags":[1668,569,46],"class_list":["post-16746","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-longreads","tag-course","tag-etf","tag-ethereum"],"aioseo_notices":[],"amp_enabled":true,"views":"26","promo_type":"","layout_type":"","short_excerpt":"","is_update":"","_links":{"self":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/16746","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/comments?post=16746"}],"version-history":[{"count":0,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/16746\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/media\/16745"}],"wp:attachment":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/media?parent=16746"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/categories?post=16746"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/tags?post=16746"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}