Is Ethereum’s Recent Price Drop a Signal that the Layer 1 Blockchain’s Future is in Question?

As the saying goes, “It’s always darkest before dawn.” No other saying applies more aptly to the future of Ethereum which is likely to remain the dominant Layer 1 blockchain solution in the future powering everything from tokenization of real-world assets to cross-border money payments, to NFT’s sales, etc. It’s important to note that short-term price action isn’t a harbinger of the viability of an asset or a technology in the future. Many people mistake asset prices (even forward prices) for forecasts for the asset’s long-term viability and future potential growth. Take Amazon as a case in point as an example drawn from Web 1.0. It would have been certainly easy to have dismissed Amazon.com as yet another generic .com from the Web 1.0 era as a company with no future prospects and destined for the same faith as the majority of .com’s who ultimately met their maker and evaporated into dust. In fact, it is human psychology that explains why most retail traders typically make the wrong investment decisions (i.e. selling losers at the bottom and chasing winners at the very top); the exact opposite perspective is what famously made Warren Buffet the oracle of Omaha and the phrase “be greedy when others are fearful and be fearful when others are greedy” was coined and has born a loyal following of investors who practice the same approach to investing (albeit few in numbers) successfully. The same holds true for today’s recent environment regarding the future for Ethereum. Given the recent spate of negative news articles about Ethereum that have recently driven bearish price action on the world’s second largest cryptocurrency by market cap, the same might be true. While it is true that news, and in particular sentiment, is a strong predictor for asset prices in the short term (particularly true for crypto currencies), one most dig deeper into the reasons causing recent bearish price action for Ethereum and look through those to assess the fundamental views on the blockchain technology and its potential future; something albeit that is extraordinarily difficult to do because individual human trading decisions (especially short term ones) can dominate price behavior as opposed to long-term “investment” decisions which are made by long-term investors that due deeper research and fundamental analysis factoring in variables such as market dominance, amount of development support in the network, technological superiority vs other potential Layer 1 blockchains, and even analyzing current recent metrics and dissecting them in order to elucidate the “true” story.

There have been plenty of recent negative developments for Ethereum that have caused its price to drop. Some of these include (but aren’t limited to the following):

Ethereum's gas fees, historically a point of contention due to their high costs, have seen a dramatic reduction. The average Ethereum gas price recently touched 8.8 gwei, the lowest since January 2020. This decline is attributed to the adoption of layer 2 scaling solutions like Optimism and Arbitrum, which have reduced congestion on the Ethereum network. Additionally, the broader crypto market's downturn has led to decreased transaction volumes on Ethereum, further pushing down fees. The first point above is a “good” thing for Ethereum. Lower gas fees ultimately incentivize more transactions to be made on the Layer 1 blockchain. Lower gas fees aren’t a “negative”. That’s a false flag. The lower the fees, the more likely the more transactions that it will invite to the network, increasing its competitive moat increasing its position as the dominant Layer 1. That’s what everyone wanted in the first place, right? And while the decline in gas fees has occurred, it also occurred concurrently with the TVL locked on Layer 2’s increasing; that is a sign that more people are transacting. Yes, it is true that there will be ebbs and flows and time lags between various indicators, but all indicators have to be looked at in totality to assess the future prospects for Ethereum. Also, making an argument the broader crypto markets downturn isn’t unique to Ethereum; rather it has been driven by many global macro factors, one of the biggest of which is a very strong dollar driven by the Fed’s rapid increase in interest rates to combat inflation. Because cryptocurrencies are priced in US dollars, there is a natural inverse relationship (everything else held constant) that has pushed cryptocurrency prices down as a result and hence, this isn’t unique to just Ethereum.

Another recent development that has put tone of negative sentiment on the price of Ethereum is that the Ethereum Foundation, a central entity in the Ethereum ecosystem, recently faced a security breach during a sale of 1,700 ETH, losing U.S. $9,101 in a "sandwich attack." This event, combined with the foundation's consistent sales just before significant market selloffs, has raised eyebrows in the crypto community. Ethereum's co-founder, Vitalik Buterin, also made headlines by selling substantial amounts of ETH, further influencing market dynamics. But these two occurrences, again, aren’t unique to Ethereum nor are they harbingers of Ethereum’s viability as a dominant Layer 1 solution. How often do public companies sell equity to raise capital to fund operations or make acquisitions? This is a normal part of running a public company. How often also, does senior management sell their private shares for personal reasons? That too, is part of business as usual. And even these two occurrences aren’t unique to Ethereum. Nor are hacks. They’re commonplace and at least the hacks are likely to diminish over time as the industry matures although even today, public companies frequently face cyber-attacks in very mature industries.

Another very recent development was a recent proposal called BitVM which aims to introduce Ethereum-style smart contracts to Bitcoin without a soft fork. This development could potentially merge the strengths of both networks, offering Bitcoin's security with Ethereum's contract functionalities. But that’s not a given, and many questions remain. Many technical questions are yet to be addressed about the viability of this proposal to replace Ethereum altogether. One such observation is that BitVM can’t be used in rollups or other multiparty applications because it only works for two parties. There are certainly others so only the future evolution of the adoption of such a proposal will prove whether it has a long-term sustainable future.

Ethereum's recent price movements have also been significantly influenced by the actions of 'whales' or large holders. Since February 2023, Ethereum whales have offloaded over 5 million ETH, equivalent to about $8.5 billion. While this massive sell-off might suggest a bearish trend, historical data indicates that reduced transaction fees often precede a price rebound. Ethereum's current trading price and technical indicators, however, paint a mixed picture, with plenty of indicators expressing mixed signals as a result with no clear winner pointing one way or another. Furthermore, as stated before, there is a difference between selling activity of shareholders (even large ones) and belief in the technology from a fundamental standpoint because the reasons for selling can be driven by other factors such as macro views or even personal needs even though the seller is still a believer in the technology.

So, while some of these recent occurrences have affected the price of Ethereum in a negative way, it is far from a foregone conclusion that they are “predictive” of Ethereum’s future viability as at least “one” the primary Layer 1’s that will power Web 3.0, if not the “dominant” one.  One thing for investors to look at is sentiment as a predictor of not just price but also a differentiated sentiment indicator developed from the Smart Money which are the equivalent of the Warren Buffets of today’s modern era of social sentiment. Market Prophit is unique in that it tracks “both” sentiment signals which can be predictive of both short as well as long-term price action. The first sentiment indicator on the platform is one called CROWD (that is the sentiment gathered equally from all crypto prognosticators on X). The second sentiment indicator is called the Market Prophit sentiment indicator and that is a highly unique sentiment signal sourced from only “those” CryptoX accounts that have verifiable and measurable objective scores applied to their crypto price predictions. The unique aspect of using both indicators in conjunction is that they serve individually and more importantly, when viewed together, as either double confirmation of conviction (this occurs when they both agree and are positive or both agree and are negative). However, an interesting case is when they disagree, and one is positive and the other is negative and vice versa. It is typically more often than not, that when their sentiment disagrees from these two distinct groups, that the “Smart Money” is more often right than not. Currently, as you can see from the two sentiment gauges below, the CROWD is currently negative on Ethereum while the Market Prophit sentiment (Smart Money) is positive on Ethereum.

                       CROWD                                                         MARKET PROPHIT

So, is the Smart-Money right? Perhaps when combined with the points made above as well as the fact that the smart money is a highly curated group of market experts, it might very well be true that it is just too early to conclude that Ethereum’s days are numbered and that it has seen the best of times. Only time will tell of course, but it is certainly something to take into consideration for investors as an additional decision factor when perhaps considering drawing conclusions too quickly on the fate and future of Ethereum.