Why Ethereum Is Down 40% This Week

Image source: Getty Images

The leading smart contract crypto is struggling more than others.

Important points

• Ethereum fell over 40% in a week, almost hitting the $1,000 mark.
• Cryptocurrencies have struggled this week amid general economic conditions and fears that Celsius – a prominent DeFi platform – could collapse.

Crypto prices have fallen dramatically this week – almost all of the top 100 cryptocurrencies are in the red and many have posted significant losses over the past seven days. Bitcoin (BTC) is down over 30% in a week and Ethereum (ETH) is down 40%. At one point, Ethereum almost touched $1,000 – a significant drop from its November high of over $4,700. Read on to find out why the recent crypto crash has hurt Ethereum more than many of its counterparts.

What is driving Ethereum’s decline?

There are several reasons why Ethereum’s price has fallen so much this week. Some relate to the broader market and economic conditions, while others are specific to Ethereum. Let’s unpack some of them.

1. The entire crypto market is down

The Crypto Fear and Greed Index, which measures market sentiment, is currently at 7 – its lowest level in years. This reflects widespread fears that crypto prices could fall even further. As central banks around the world implement tough economic tightening measures to get inflation under control, riskier assets like crypto are suffering. Also, fears of a recession and rising cost of living are making people more reluctant to buy crypto.

These extreme price conditions are affecting the decentralized finance (DeFi) industry, which – as we’ve seen – can quickly snowball. DeFi is a core component of the broader cryptocurrency market, and many DeFi apps are based on Ethereum. The question marks hanging over the future of several major players are almost certainly contributing to Ethereum’s downtrend. Additionally, these sudden price drops could prompt authorities to make regulatory changes more quickly, which could push prices even lower.

2. Ethereum merger delays

Ethereum was the first cryptocurrency to introduce smart contracts and many applications are based on its network. However, grid congestion and high gas fees have prompted a number of developers and investors to look for alternatives. Until Ethereum can stage an upgrade to address these issues, it will continue to lose market share.

The Ethereum merger is a crucial milestone. The merger won’t fix high gas rates or heavy congestion, but it’s an important step toward the eventual upgrade that will. The merger is a shift from a proof-of-work mining system to a proof-of-stake model that is significantly more environmentally friendly. There’s a lot of excitement about the merger, but delays have also been a cause for concern.

Most recently, Ethereum developers said they were delaying something dubbed a “difficulty bomb” — built-in code designed to encourage miners to switch to the new proof-of-work system. The difficulty bomb’s delay has sparked fears that the merger could be delayed beyond its currently hoped August launch.

3. Issues with staking Ethereum

There is currently a great deal of mistrust of decentralized financial platforms. This follows the collapse of Terra (LUNA) and Celsius’ decision to pause payouts. Without going into too much detail, there is a form of staked Ethereum called stETH on a DeFi platform called Lido. What is scaring investors is that stETH has lost its peg – meaning that a stETH is no longer worth ETH. According to a report by Huobi, there is a risk that the falling stETH price could trigger a chain of liquidations with “severe” consequences.

bottom line

Markets don’t like uncertainty, and there’s a lot of that in the crypto market right now. For Ethereum, the upcoming merger brings uncertainty upon further uncertainty, which is one reason it has been overly affected by the recent turmoil.

If the merger goes well, it will give both Ethereum and the overall market a much-needed boost. But it’s a big upgrade and there can certainly be technical difficulties, no matter how thorough the testing. Unfortunately, disruptions or additional delays are putting more pressure on Ethereum’s price. The fear is that if Ethereum fails to solve some of its problems, it will not be able to maintain its dominant position in the smart contract world.

Some investors may be tempted to buy the dip and acquire ETH at a relative discount. However, the price could fall further, especially if the merger is delayed again. Make sure you understand the risks and only invest money you can afford to lose – this way Ethereum won’t derail your finances if it fails to maintain its leading position.