Ethereum Struggles as Market Sentiment Deteriorates
Ether (ETH) is struggling to maintain the $2,000 support as of Nov. 27, following its third unsuccessful attempt in 15 days to surpass the $2,100 mark. This downturn in Ether’s performance comes as the broader cryptocurrency market sentiment deteriorates, thus one needs to analyze whether recent developments have contributed to the negative outlook.
In a filing on Nov. 22 to a Seattle federal court, U.S. prosecutors sought a review and reversal of a judge’s decision permitting Binance founder Changpeng “CZ” Zhao to return to the United Arab Emirates on a $175-million bond. The U.S. Department of Justice (DOJ) argues that Zhao poses an “unacceptable risk of flight and nonappearance” if allowed to leave the U.S. pending sentencing.
Ethereum DApps and DeFi face new challenges
The recent $46 million KyberSwap exploit on Nov. 23 has further dampened demand for decentralized finance (DeFi) applications on Ethereum. Despite being previously audited by security experts, including a couple in 2023, the incident has heightened concerns about the safety of the overall DeFi industry. Fortunately for investors, the attacker expressed willingness to return some of the funds, yet the event underscored the sector’s vulnerabilities.
Additionally, investor confidence was shaken by a Nov. 21 blog post from Tether, the firm behind the $88.7 billion stablecoin USD Tether (USDT). The post announced the U.S. Secret Service’s recent integration into its platform and hinted at forthcoming involvement from the Federal Bureau of Investigation. The lack of details in the announcement has led to speculation about an increasingly stringent regulatory landscape for cryptocurrencies, especially with Binance facing heightened scrutiny and Tether’s closer collaboration with authorities. These factors are likely contributing to Ether’s underperformance, with various on-chain and market indicators suggesting a decline in ETH demand.
Investors become cautious as ETH on-chain data reflects weakness
Ether exchange-traded products (ETPs) saw only a $34 million inflow in the last week, according to CoinShares. This figure is a modest 10% of the inflow seen by equivalent Bitcoin (BTC) crypto funds during the same period. The competition between the two assets for spot exchange-traded fund (ETF) approval in the U.S. makes this disparity particularly noteworthy.
Moreover, the current 7-day average annualized yield of 4.2% on Ethereum staking is less appealing compared to the 5.25% return offered by traditional fixed-income assets. This disparity led to a significant $349 million outflow from Ethereum staking in the previous week, as reported by StakingRewards.
High transaction costs continue to be a challenge, with the seven-day average transaction fee standing at $7.40. This expense has adversely affected the demand for decentralized applications (DApps), leading to a 21.8% decline in DApps volume on the network in the last week, as per DappRadar.
Notably, while most Ethereum DeFi applications saw a significant drop in activity, competing chains like BNB Chain and Solana experienced an 11% increase and stable activity, respectively.
Consequences for Ether and the broader market
Consequently, Ethereum network protocol fees have decreased for four consecutive days, amounting to $5.4 million on Nov. 26, compared to a daily average of $10 million between Nov. 20 and Nov. 23, as reported by DefiLlama. This trend could potentially create a negative spiral, driving users towards competing chains in search of better yields. Ether’s current price pullback on Nov. 27 reflects growing concerns over regulatory challenges and the potential impact of exploits and sanctions on stablecoins used in DeFi applications.
The increasing involvement of the DOJ and FBI with Tether elevates the systemic risk for liquidity pools and the entire oracle-based pricing mechanism. While there’s no immediate cause for panic selling or fears of a drop to $1,800, the lackluster demand from institutional investors, as indicated by ETP flows, is certainly not a positive sign for the market.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
