2 Major Reasons Behind Ethereum's Dramatic Decline

Anisa Batabyal
| 06 May, 2020 | 2 min

The crypto market has been going through a huge turbulence, but the most infected one is Ethereum, whose speed of decline was higher than the rest of the coins. The biggest failure that Ethereum has experienced is going down the ranking order in terms of market capitalization as Ripple(XRP) replaced Ethereum to grab the position of the second largest cryptocurrency in the world. The ETH decline has been regarded as one of the worst declines in the history of the cryptocurrency market. At the beginning of the year, it was trading around $800, then fell drastically to around $200, and now even below $100.

According to Cumberland, BTC is nowadays taking 70% of the trading volume as opposed to the equal share of trading volume by BTC and ETH that used to happen before. The only hope for Ethereum is the upcoming Constantinople in January 2019 which can save ETH from not declining further and reaching zero, as predicted by Vitalik Buterin before. This update might uplift the price of ETH, having the probability of putting the blockchain in a higher level than TRON(TRX).

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This dramatic Ethereum value fall left many wondering if it has hit the bottom yet and if not…then when?

According to a forecast from Joseph Lubin, the co-creator of Ethereum and founder of ConsenSys said that forget the price decline- Ethereum adoption is growing at a rapid rate. He mentioned in a statement that there have been 1 million Truffle downloads, 1 million MetaMask downloads and 10 billion daily API requests served by Infura. INfura, Truffle and MetaMask are Ethereum products. 

Why is Ethereum falling?

Ethereum has fallen by around 13% in a week and gained around 0.53% in the last 24 hours. Ethereum is down by around 93% since its all-time high rate, sinking to 17-month-low.Even ETH Has struggled to solve the scaling problem with Sharding, Plasma and Casper and despite the smart contract, ERC20 tokens have failed to deliver products suitable for mainstream users.There was an update that the GPU mining of ethereum and other cryptocurrencies has been suffering from the prolonged crypto market downturn along with the dominance of more efficient ASIC miners. Ever since the beginning of the bear market, several mining pools have left the market. This is because of its diminishing profitability and the miners left are looking to squeeze out as much efficiency as possible from the mining rigs as small margins can often be the difference between staying profitable or going into the red from month to month.

Let's understand what are the factors which led to this unexpected fall of ETH

  1. Two days back, more than 80,000 ETH were transferred to the Kraken Exchange in two different transactions which might be the holdings of an Initial Coin Offering(ICO) and is wanting to sell for avoiding losses as the price is likely to fall even further down to $60 according to some of the crypto market analysts. Some people are even saying that ETH would never see the face of three digits anytime soon.This itself gave birth to many tweets and discussions, which are highlighted below : As  pointed out by Cryptoeazy on Twitter, since the constantinople news got announced, ETH price got raised to a bit more, which he doesn't consider as a coincidence.

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  1. The ICO sell-off factor, with many traders claiming that projects have begun to liquidate their war chests, that are often full of Ether, into fiat, leading to the current collapse of the market, not only ETH. The ICOs that have been raising money over the past few months have to meet development costs. Although ETH can be used for a number of things, the bulk of the costs of running a startup are in fiat currency. Hence, these projects would have to get the bulk of their ICO pot converted into fiat currency. This shows bad Asset / Liability management principles on their part and hence resulted in them getting caught off guard with the fall in the value. This has led to a sort of self-fulfilling prophecy as ICOs panic that other ICOs are selling and crashing the price.

    Some investors have even pointed out that they were disillusioned with the ICO projects which led to the price decline, causing a backlash on the platform hosting ERC-20 tokens.

Is the Bad Time Over for ETH?

Apart from a certain portion of the ICO sell off, there are people who are still holding a fair amount of ETH. Marat Garafutdinov, an analyst from HASH CIB wrote that its the ICO projects reacted to the market conditions instead of dictating them. Still, the treasuries hold at least 3.5% of the total ethereum supply. He even adds that the researches mistook the Ethereum moved to Ethereum sold, which is not true.

Even the much-hyped Ethereum Improvement Proposal (EIP) could see the coin move to a Proof-of-Stake consensus. So, while the impact of ICO selling could persist throughout this bear market when eventually the “panic” would cease. If developments continue and the updates are successfully rolled out, institutional and retail demand from Ethereum could pick up again.

Hence, in the short term, it is more likely that the ICO phenomenon could still impact on the price of ETH. However, in the medium to long-term, the focus will once again pivot to the technology.

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