Ethereum price drops to a 7-month low as data points to more downside

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Ether (ETH) price experienced a 7% decline between Oct. 6 and Oct. 12, hitting a seven-month low at $1,520. Although there was a slight rebound to $1,550 on Oct. 13, it appears that investor confidence and interest in Ethereum are waning, as indicated by multiple metrics.

Some may argue that this movement reflects a broader disinterest in cryptocurrencies, evident in the fact that Google searches for “Ethereum” have reached their lowest point in 3 years. However, Ethereum has underperformed the overall altcoin market capitalization by 15% since July.

Ethereum” keyword search, globally. Source: Google Trends

Interestingly, this price movement coincided with Ethereum’s average 7-day transaction fees declining to $1.80, the lowest level in the past 12 months. To put this in perspective, just two months ago, these fees stood at over $4.70, a cost considered high even for initiating and closing batched layer-2 transactions.

Regulatory uncertainty and lower staking yield back ETH’s price decline

A significant event that impacted Ether’s price was the remarks made by Cardano founder Charles Hoskinson regarding U.S. Securities and Exchange Commission director William Hinman’s classification of Ether as a non-security asset in 2018. Hoskinson, who is also an Ethereum co-founder, alleged on Oct. 8 that some form of “favoritism” influenced the regulator’s decision.

Ethereum staking has also garnered less interest from investors participating in the network validation process, as the yield decreased from 4.3% to 3.6% in just two months. This change occurred alongside an increase in ETH supply due to reduced activity in the burn mechanism, reversing the prevailing scarcity trend.

On Oct. 12, regulatory concerns escalated after the Autorité de Contrôle Prudentiel et de Résolution (ACPR), a division of the French Central Bank, highlighted the “paradoxical high degree of concentration” risk in decentralized finance (DeFi). The ACPR report suggested the need for specific rules governing smart contract certification and governance to protect users.

Derivatives data and dropping TVL reflect bears’ control

Taking a closer look at derivatives metrics provides insight into how professional Ether traders are positioned following the price correction. Typically, ETH monthly futures trade at a 5 to 10% annualized premium to compensate for delayed trade settlement, a practice not unique to the crypto markets.

ETH 2-month futures premium vs. spot market. Source: Laevitas.ch

The premium for Ether futures reached its lowest point in five months on Oct. 12, signaling a lack of demand for leveraged long positions. Interestingly, not even the 8.5% Ether price rally between Sept. 27 and Oct. 1 could push ETH futures above the 5% neutral threshold.

Ethereum’s total value locked (TVL) decreased from 13.3 million ETH to 12.5 million ETH in the past two months, indicating reduced demand. This trend reflects diminishing confidence in the DeFi industry and fewer advantages compared to the 5% yield offered by traditional finance in U.S. dollars.

Ethereum network TVL ex-native staking. Source: DefiLlama

To assess the significance of this decline in TVL, one should analyze metrics related to decentralized application (DApps) usage. Some DApps, including DEX exchanges and NFT marketplaces, are not financially intensive, rendering the value deposited irrelevant.

Ethereum top DApps 7-day active addresses. Source: DappRadar

Regrettably, for Ethereum, the drop in TVL is accompanied by decreasing activity in most ecosystem DApps, including the leading DEX, Uniswap, and the largest NFT marketplace, OpenSea. The reduced demand is also evident in the gaming sector, with Stargate showing only 6,180 active accounts on the network.

While regulatory concerns may not be directly related to Ether’s classification as a commodity, they could adversely affect the DApps industry. Furthermore, there is no assurance that key pillars of the ecosystem, such as Consensys and the Ethereum Foundation, will remain unaffected by potential regulatory actions, particularly in the U.S.

Considering the reduced demand for leveraged long positions, declining staking yields, regulatory uncertainties, and a broader lack of interest, as reflected in Google Trends, the likelihood of Ether dropping below $1,500 remains relatively high.