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Ethereum's Difficulty in Breaching $1.9K: A Detailed Analysis
Ethereum's price may face a short-term downturn due to a declining trend in deposits, a drop in DEX volume market share, and futures data indicating a bearish sentiment among traders. Since May 12, maintaining the $1,800 support level for Ether has been a challenge. The cryptocurrency world's regulatory uncertainties and the high transaction fees of the Ethereum network are intensifying this struggle. Three key signs suggest a decrease in demand for Ethereum's decentralized applications (DApps) and a dwindling interest from institutional traders, impacting Ether's value.
Regulatory Bodies Aim to Tighten Grip on Crypto Intermediaries
Court documents submitted on May 15 reveal that the United States Securities and Exchange Commission (SEC) responded formally to Coinbase's appeal for clearer cryptocurrency regulation. The SEC hinted that forming such regulations might take years and enforcement actions wouldn't halt during that period.
On May 16, the Economic and Financial Affairs Council of the European Union, representing all member states' finance ministers, ratified the much-awaited Markets in Crypto-Assets (MiCA) regulation, set to be implemented by mid-2024. While some believe MiCA will stimulate business growth in the region, others highlight the risk to personal data privacy and non-custodial solutions, including DeFi applications.
Concerns Over Declining DApp Deposits
The Ethereum network is grappling with skyrocketing gas fees — the expense associated with transactions, including those governed by smart contracts. Over the last month, the average transaction fee has consistently hovered above $9, significantly inhibiting DApp usage.
Deposits in Ether on the Ethereum network have dropped to their lowest since August 2020, excluding the impact of recent Ethereum staking, which now allows withdrawals. DefiLlama data shows that Ethereum DApps had a total value locked (TVL) of 14.9 million ETH on May 16, a 10% decline from 16.5 million ETH two months earlier. In contrast, the TVL on BNB Smart Chain remained stable, while Polygon's network deposits saw a 29% rise.
BNB Smart Chain Threatens Ethereum's DEX Volume Dominance
Ethereum has been the undisputed leader in decentralized exchange (DEX) volume since its inception, but this dominance is now being contested. Ethereum's DEX volume market share was at 75% as of the week ending March 5 but fell to a record low of 39.6% by the week ending May 14.
Arbitrum and BNB Smart Chain have seen considerable growth in DEX trading volume since March 5, with Arbitrum rising to 14% from 7%, and BNB Smart Chain escalating to 31% from 5.6%. Although this could be interpreted as bullish for Ether's price, the connection is not so straightforward.
Professional Traders Show Bearish Sentiment
Ether's quarterly futures, favored by whales and arbitrage desks, usually trade at a slight premium to spot markets, indicating that sellers demand more money for delayed settlement.
Healthy markets usually see ETH futures contracts trade at a 5 to 10% annualized premium — a situation known as contango. However, since early April, professional traders have been shying away from leverage longs (bullish bets). The current 1% ETH futures premium is on the verge of turning negative, a scenario known as backwardation. If this occurs, it's a worrying sign, indicating bearish demand is in control.
In conclusion, these three factors — diminished TVL, a record-low DEX market share, and the absence of leverage buying demand — suggest that the $1,900 resistance level will be difficult to surpass in the short term. For now, it seems Ether bears hold the reins, increasing the likelihood of a price correction.
