Several factors are pushing Ethereum (ETH) down. They include the high ETF futures open interest, spot Ethereum ETF launch, and stagnant Ethereum network usage.
Ether (ETH) ventured above $3,900 on many occasions in the past week but has been unable to sustain that level. The market appeared to have anticipated a boost from the spot Ethereum exchange-traded fund (ETF) approval by the United States Securities and Exchange Commission (SEC), as Ether’s gains happened on May 21, two days before the decision.
Ethereum Spot ETF Approval: Not Everything Happened As Expected
One could say that the spot ETF traders are still awaiting their respective Form S-1 approval for each of the funds. Eric Balchunas, a senior Bloomberg ETF analyst, expects the Ethereum spot instruments to begin trading by July 4, while his counterpart James Seyffart noted that BlackRock’s updated S-1 on May 29 means that “issuers and SEC are working towards spot Ethereum ETF launches.”
Nonetheless, analysts suggest that ETH might encounter pressure in case the Grayscale Ethereum Trust (ETHE) experiences significant outflows in the weeks after the conversion to an ETF. A similar issue has affected Grayscale’s Bitcoin fund (GBTC) due to its high fees. Some of them speculate that Grayscale ETHE outflows alone could surpass $100 million in a day in the first weeks, hence offsetting and in some cases exceeding any inflows from the newcomer projects.
A similar issue has impacted Grayscale’s Bitcoin fund (GBTC) because of its high fees. Some analysts speculate that Grayscale ETHE outflows alone might surpass $100 million daily in the initial weeks, hence offsetting or even exceeding any inflows from newcomers.
Essentially, part of Ether’s failure to break the $3,900 resistance comes from the rally that preceded the famous spot ETF approval. The fact that some of the investors are disappointed that effective trading will take longer has also created some uncertainty and a negative price effect. That might spell trouble as Ether’s futures open interest increased to its highest level ever on May 28, 2024.
$16.8 Billion In Ether Futures Causes Liquidation Risks
The open interest gauges the total number of ETH futures contracts available on each derivatives exchange, including OKX, Binance, Bybit, and CME.
Although ETH futures longs and shorts are matched always, a higher notional in play means the risk of liquidations increases exponentially. For instance, in case longs are using 10X leverage, on average, the contracts will be forcefully liquidated in case Ether’s price plunges by 10%.
A similar opposite movement may happen in case Ether’s price abruptly rallies 10% and shorts are the ones that need to use excessive leverage.
In such incidents, the crypto exchanges will automatically acquire ETH futures to mitigate their risk and close the positions lacking the respective margin deposits. Consequently, Ether’s futures $16.8 billion open interest now poses a major risk for potential buyers, keeping the ETH price significantly below $3,900.
Competing Networks Exceeded Ethereum’s Activity Growth
Ethereum’s high gas fees might be considered a sign of success, which indicates constant demand for block space. Nonetheless, they also offer a chance for competing blockchains that focus on increased scalability. Part of that activity has migrated to Ethereum layer-2 solutions. However, some users and projects now opt for Solana, BNB Chain, and Aptos.
It would be wrong to assume that each decentralized application (DApp) needs the level of decentralization that Ethereum offers. Users who engage in simple gambling, finance, and games are unwilling to utilize bridge solutions to access a lower-fee environment. Therefore, Ethereum’s mainnet volume growth falling behind its competitors is considered as a missed opportunity.
Ethereum’s 122,350 daily active addresses engaging with DApps (UAW) dropped by 2% on May 30 compared to the past day. On the same note, the total volume transacted on the Ethereum network increased by 2% in the same period. The data means that despite Ethereum’s robust fundamentals, many dApp use cases, and diverse investor profiles, there is some tendency to adopt the other blockchains.
For instance, BNB Chain’s 508,610 daily active addresses are over four times higher than Ethereum’s. The users transacted over $3.5 billion on PancakeSwap in the last week, while one dApp, Move Stake, gathered over 226,350 active addresses within the same period. In general, Ethereum’s on-chain metrics do not inspire any confidence, which further limits Ether’s potential to break past the $3,900 level in the near term.
