EthereumN : Why did the cryptocurrency drop by 22 % in August ?

Ethereum just experienced its worst month in over two years. In August, ETH fell by 22%, erasing any hope of a quick recovery. This drop comes in a context where many observers expected 2024 to be positive for crypto, notably thanks to the anticipation of new regulations and the approval of the ETF. However, the reality was quite different. Various factors plunged the market into a bearish spiral.

Massive ETF withdrawals and reduced network activity

In August 2024, Ethereum suffered a substantial loss of 22 %. This is the most severe since the collapse of Terra in June 2022, which caused the crypto to drop by 45 %. Experts mainly point to the significant outflows from Ethereum ETFs, a product meant to attract more institutional investments. Luke NOLAN, a research associate at CoinShares, said: “I think the elephant in the room is definitely the outflows from Ethereum ETFs.” Initially well-received, the ETFs have recorded disappointing performance with net outflows of nearly half a billion dollars since their launch. Nolan points out that as of August 30, no inflows were recorded for Ethereum products.

The impact of ETF outflows is amplified by the significant reduction in activity on the main Ethereum network. Data from TokenTerminal reveals that revenues generated from transaction and computational execution fees on Ethereum have dropped by 99 % over the past six months. This decline is largely attributed to the rise of Layer 2 scalability solutions, such as Arbitrum, Optimism, and Base, which drain volume, usage, and capital from the main network. “It’s a momentary cannibalization,” explained NOLAN. He predicts a future differentiation where Layer 1 (L1) will be used for high-value transactions, while Layer 2 (L2) will capture mass applications requiring fast and less expensive transactions.

Vitalik Buterin’s comments and macroeconomic volatility

Beyond technical factors, Ethereum’s rough patch has also been exacerbated by controversial comments and actions from its leaders. Vitalik Buterin, Ethereum’s co-creator, had, among other things, declared that “DeFi is unsustainable,” a statement that shook the crypto community and cast doubt on the viability of many projects built on Ethereum crypto. Furthermore, the Ethereum Foundation sold about 100 million dollars worth of ETH, an operation that further fueled investor skepticism about the future of the crypto.

The situation was further complicated by global macroeconomic instability. Dessislava LANEVA, a research analyst at Kaiko, noted that “the deterioration in global risk sentiment in August, due to US growth fears as well as the unwinding of short-term carry trade positions on the yen, exerted additional pressure on ETH.” Investors turned away from risky assets. Additionally, the ongoing US presidential campaign also weighed on Ethereum. Some observers, like Matt HOUGAN of Bitwise, claim that the crypto is more exposed to political uncertainties than Bitcoin due to its central role in the ecosystem of smart contracts and decentralized finance.

For now, caution is advised, but Ethereum’s strong fundamentals and leading role in the blockchain ecosystem suggest significant rebound potential in the medium and long term.