ETH ethereum has crashed spectacularly in recent days and broke under the $2,500 support level. This downturn has sparked concerns among investors about whether this signals the beginning of a longer-term bearish trend for ETH and the broader cryptocurrency market. A variety of factors, from macroeconomic events to specific on-chain activities, have played a role in this price decline. Miles O’Connor explores the top factors fueling this volatility. He offers advice on the most profitable trading techniques to keep you ahead of market turmoil.

Macroeconomic Factors Influencing Ethereum's Price

U.S. Inflation and Market Correction

Further, the U.S. inflation reading released on Wednesday was a big factor behind the recent market movements. The small print the numbers came in a little colder than expected. Even still, they did not do enough to relieve concerns about the growing debt load of the U.S. government. The cryptocurrency market did go wild at first. This market expansion was ephemeral as a subsequent market correction ensued causing Ethereum’s price to decrease significantly. Investors are still jittery and anything suggesting economic weakness is a reason for the market to sell off risk assets such as cryptocurrencies.

Geopolitical Tensions and Risk Asset Correlation

Geopolitical tensions, such as the ongoing Russia-Ukraine war and the recent escalation of conflict between Israel and Iran, can significantly impact the cryptocurrency market. In this use case, cryptocurrencies, and Ethereum specifically come to mind as alternative hedging instruments for geopolitical risk. These tensions increase price volatility to an alarming degree. As we saw when the Israel-Iran conflict worsened earlier this year, Ethereum prices plummeted. With heightened geopolitical risk and uncertainty, Ethereum and cryptocurrencies in general have been trading very correlated with risk assets such as equities. This negative correlation forces investors into larger sell-offs as they retrench their appetite for risk. Geopolitical tensions tend to trigger profit taking among traders. When they’re faced with losses, they stampede to lock in profits or reduce their exposure to risky assets, amplifying the pressure to push prices further down.

Mass Liquidations and Market Sentiment

This price decline has been exaggerated by a wave of monumental liquidations within the crypto futures marketplace. Within a single day, more than $683.4 million in crypto futures were liquidated. Long positions accounted for an eye-watering $617.85 million of those liquidations. This is a sign of extreme leveraged trading. It further warns of potential cascading sell-offs if prices move the wrong way on these positions. Indeed, downside risk continues, with a high likelihood of dragging Ethereum price towards $2,280 in case market sentiment declines deeper. Ethereum’s price is primarily determined by the fundamentals within Ethereum itself. It is deeply impacted by the general direction of the market at large.

On-Chain Activity and Whale Behavior

Whale Accumulation and Distribution Patterns

Observing the behavior of large Ethereum holders, aka “whales,” can offer a great deal of insight into Ethereum’s future trends. The number of Ethereum whales (crypto wallets holding between 1,000-10,000 ETH) has dropped consistently to a total of 5,378. That doesn’t mean they’re not confident. There is a much bigger trend of accumulation that’s going on across Ethereum’s entire ecosystem. For example, one whale sold 30,000 ETH ($78.6 million) at $2,621 per token but then repurchased 16,500 ETH ($46.4 million) at $2,818. This indicates that there is a high level of conviction that Ethereum will move up in price substantially. The whale’s eagerness to repurchase at a premium price confirms that expectation. This increased activity peaked to 10,000 daily whale transactions earlier this month as the supply onex recovery rally was underway. That enthusiasm quickly calcified when prices stopped increasing. Moreover, large holders are demonstrating high conviction by buying ETH even at higher prices. This indicates their deep conviction in the asset’s longer-term potential.

Exchange Withdrawals and Holding Patterns

The second-best measure of overall market sentiment is the flow of Ethereum into and out of exchanges. On August 1, investors pulled $393 million worth of over 140,000 ETH off exchanges in a single day. This move is the largest single day withdrawal we have witnessed in a month. This indicates a broad-based interest in holding Ethereum rather than trading it, as investors move their assets to personal wallets for longer-term storage. Most investors consider this recent price decline a great buying opportunity. This ongoing withdrawal trend shows they are setting themselves up to win in the long haul.

Competition and Scalability Challenges

Alternative Cryptocurrencies

Ethereum is under greater competition than ever before, with other cryptocurrencies enabling quicker and cheaper transactions. Ethereum's scalability challenges and high gas fees for certain transactions, which can reach as high as $50, make it less attractive to some users. Emerging competitors like Solana, Polkadot and Cardano entice investor dollars with the promise of quicker, cheaper transactions. This type of competition threatens to siphon capital away from Ethereum.

Trading Strategies and Future Outlook

Navigating Volatility

With a battling market, what are the best investor strategies to survive the turbulence.

  • Dollar-Cost Averaging (DCA): Consider using a dollar-cost averaging strategy, where you invest a fixed amount of money at regular intervals, regardless of the price. This can help mitigate the impact of short-term price fluctuations.
  • Hedging: Use hedging strategies to protect your portfolio from potential losses. This could involve using derivatives or stablecoins to offset your exposure to Ethereum.
  • Stay Informed: Keep abreast of market news and developments, including macroeconomic indicators, geopolitical events, and on-chain activity. This will help you make more informed trading decisions.

Long-Term Potential

Even with the recent price plunge, Ethereum should definitely be on the radar of any long-term crypto investor. Ethereum is currently trading at $1,574, over 50% less than it was a year ago. Concentrate purely on whether the investment thesis for it going up in value is becoming stronger or weaker. In the past, every Ethereum bull cycle has increased its prior all-time high 5 to 7x. One analyst went as far to say that Ethereum will approach $5,791. This target is supported by increasing rarity and powerful technical momentum, suggesting that the bear market may truly be ending at last. On the positive side, Ethereum’s realized price currently is $1,900 a strong psychological floor. Since the spot price is above this level right now, the majority of wallets are in profit.

Just the other day Ethereum’s price fell under $2,500. This steep drop is largely a product of combined macroeconomic forces, on-chain activity, and brutal competitive pressures from other crypto assets. Though the moment-to-moment volatility can be disconcerting, it’s an exciting time for investors with the right long-term perspective. By taking the time to understand and unpack the underlying drivers of these movements, investors can better navigate today’s market uncertainty. They can employ smart trading tactics to set themselves up for long-term success.