On June 21, Ethereum, the world’s second-largest cryptocurrency by market capitalization, crashed as low as 10 cents—its Lowest level since May 2017—amid a broad sell-off in digital assets. The price of ETH, the native cryptocurrency of the Ethereum blockchain, has since recovered to around $225 at the time of writing, but the crash nonetheless spooked investors and sent shockwaves throughout the industry.
So, what caused Ethereum’s price to collapse so dramatically? Let’s take a look at some of the possible factors:
1. The DeFi Craze Fades
One of the main drivers of Ethereum’s growth in recent months has been the rise of decentralized finance (DeFi). DeFi is a catch-all term for various protocols and financial instruments built on Ethereum that allow users to do things like borrow and lend crypto, trade tokens without an exchange, and earn interest on their digital assets.
The value locked in DeFi protocols surged from around $1 billion in January 2020 to a peak of nearly $13 billion in mid-June, according to data from DeFi Pulse. This influx of capital helped to drive up the price of ETH as users needed to purchase the cryptocurrency to use most DeFi protocols.
However, the value locked in DeFi protocols has since plummeted by over 50% amid the sell-off in ETH and other digital assets. This could be one reason why ETH’s price has come crashing down.
2. Bitcoin’s Price Drops
Another potential factor behind Ethereum’s price crash is the sell-off in Bitcoin (BTC). Bitcoin is often referred to as digital gold due to its store of value properties, and it tends to lead the rest of the cryptocurrency market—including Ethereum—on both up and down days.
So when BTC’s price starts falling, other digital assets usually follow suit.
NOTE: WARNING: Investing in Ethereum is risky and can lead to significant losses. Ethereum’s price is highly volatile and the price of Ethereum can crash suddenly and without warning. Factors such as network upgrades, changes in regulatory policies, market speculation, and global economic conditions can all contribute to a crash. Before investing in Ethereum, it is important to understand the risks associated with it and make sure you are comfortable with them.
Indeed, BTC’s price has dropped sharply over the past week from around $9,700 to below $8,000 at the time of writing. This 7% decline likely played a role in Ethereum’s even sharper fall.
3. Negative Sentiment Around ICO Investigations
Another potential driver of Ethereum’s crash is negative sentiment around ongoing investigations into initial coin offerings (ICOs) that took place during Ethereum’s early days. ICOs are a way for blockchain projects to raise funds by selling tokens to investors; many ICOs were conducted on the Ethereum network during its first few years of existence.
However, it now appears that some ICO projects may have been engaged in fraud or other illegal activities. The U.S.
Securities and Exchange Commission (SEC) has launched investigations into a number of these projects, and this could be weighing on investor sentiment around Ethereum. After all, if investors believe that many ICO projects were built on fraudulent foundations, they may be less likely to trust other projects built on Ethereum—even if those projects are legitimate.
4. Technical Factors
Finally, it’s worth noting that there are also some technical factors that could have contributed to Ethereum’s sharp decline over the past week or so. For one thing, ETH was trading at historically high levels in recent months, which can often lead to a pullback or correction as investors take profits off the table.
Additionally, there was a large amount of open interest in ETH futures contracts on derivatives exchanges prior to the crash; this could indicate that many traders were holding long positions with leverage—meaning they had bet that ETH would continue rising—and were forced to liquidate their positions at a loss as the price started falling sharply.
All things considered, it appears that a perfect storm of factors came together to cause Ethereum’s sharp price decline over the past week or so. The DeFi craze appears to have cooled off for now, BTC’s price is down sharply, negative sentiment around ICO investigations is mounting, and there are also some technical factors at play.
It remains to be seen whether ETH can recover from this sell-off or if this is just the beginning of a longer-term trend downwards.
7 Related Question Answers Found
The highly anticipated Constantinople hard fork was supposed to occur on January 16th but ended up being postponed due to a last-minute security vulnerability. The fork was rescheduled for February 27th, but that date has also come and gone without any action. So, what’s the hold up?
When the DAO hack occurred, the Ethereum community was faced with a dilemma. The hacker had stolen Ether from the DAO and it was not clear how to best retrieve the stolen funds and return them to the rightful owners. After much discussion, the community decided that the best course of action was to hard fork the Ethereum blockchain.
On November 12, 2020, Ethereum dropped by over 13% in a matter of hours, and at one point, was down over 20%. This was a significant drop compared to other major assets, including Bitcoin, which only dropped by about 3% during the same time period. There are a few possible explanations for why Ethereum dropped so much compared to other assets.
The fall of Ethereum was caused by a variety of factors. The most important factor was the DAO hack. The DAO was a decentralized organization on the Ethereum blockchain that raised over $150 million in ether.
When the DAO hack occurred, the Ethereum community was faced with a choice. They could either hard fork the Ethereum blockchain to refund the DAO investors, or they could do nothing. The majority of the community decided to hard fork, but a small group disagreed.
When it comes to cryptocurrencies, Ethereum has been one of the most popular platforms in recent years. However, that doesn’t mean that it’s immune to market fluctuations. In fact, Ethereum has been on a bit of a downward trend lately.
Ethereum, the world’s second-largest cryptocurrency by market value, is losing ground after hitting record highs. The digital currency fell as much as 20 percent on Wednesday, extending its losses from the previous session. The sell-off in Ethereum comes as a surge in the price of Bitcoin, the world’s largest cryptocurrency, appears to be losing momentum.
