Ethereum: Liquidity Driven Death Spiral

May 06, 2022 1:27 PM ETEthereum USD (ETH-USD)BTC-USD18 Comments7 Likes
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Summary

  • As access to cash becomes harder, small tech firms (ERC-20 tokens) start to fail.
  • Over time, lack of liquidity means less demand for Ethereum and lower prices.
  • In the near term, Ethereum can drop to $2.4k-$2.2k, and in the long term, Ethereum can bottom between $1.8k-$950.

Ethereum. Crypto currency

znm/iStock Editorial via Getty Images

With the US 30Y Bond yield above 3%, cryptocurrencies are now in a bear market similar to 2018. From a fundamental perspective, our outlook is as follows:

  1. As interest rates increase, access to cash becomes harder
  2. With no ability to raise cash, small tech firms (i.e., tokens on the ETH blockchain) start to fail
  3. As a result, demand for Ethereum (ETH-USD) lessens
  4. Repeat

ETHvsUS30Y [5/4/22]

ETH vs US 30Y [5/4/22] (TradingView)

High interest rates are very bearish for Ethereum. The crypto market moves extraordinarily fast, which means crypto companies need LOTS of cash to power rapid growth. With no cash available, this can lead Ethereum's ERC20-token economy to move in a death spiral.

If we project Ethereum's 2018 downtrend onto today, we can see the cryptocurrency bear market has only just begun. From peak to trough, Ethereum's price dropped 94% in 2018. Accordingly, this fractal now projects ETH to bottom near $950 in October 2022:

ETH Bottom Fractal [5/4/22]

ETH Bottom Fractal [5/4/22] (TradingView)

Another 94% correction for Ethereum must be impossible, right? At Bitfreedom Research, we suspect Ethereum can bottom anywhere between $1.8k-$950. Specifically, we'll be watching onchain analytics to see how Ethereum's supply distribution reacts to the under $2.5k range.

Ethereum Elliott Waves

Ethereum's bear market began on November 10th, 2021, the same day the asset reached a new all-time high. Since this peak, Ethereum has moved within a massive ABC wave correction:

ETH: Daily [5/4/22]

ETH: Daily [5/4/22] (TradingView)

At the time of writing, ETH has completed its B wave reflexive rally (back to $3.4k) and it is now gaining speed within its C wave.

We can view this C wave in more detail through Ethereum's 8-Hour chart. Charted below, the repeating series of 1's and 2's is one of the best identifiers for a big, long directional move. The Elliott Wave set-up shows Ethereum is at risk of dropping to $2.5k - $2.3k in the immediate term:

Ethereum 8H [5/4/22]

ETH: 8H [5/4/22] (TradingView)

Currently, many investors feel they are 'safe' in both Bitcoin (BTC-USD) and Ethereum. However, reality couldn't be farther from the truth. Investment analyst Lance Roberts recently described this 'up-only', rigid mindset (typical of young investors) in his latest blog:

  • "Since the middle of 2021 and continuing in 2022, the speculative fervor of retail investors chasing stocks like AMC, GameStop, Bed Bath & Beyond, and many others, ended just as expected. As interest rates rose, liquidity reversed, and the Fed became more aggressive on monetary policy, the "YOLO" stocks became "OH NO" [source].

Simply put, a majority of the economic activity conducted on Ethereum within the past two years has been a result of:

1) Venture Capital Funds

2) Millennial/Gen Z Speculators

As is observable through Ethereum's recent downtrend, it appears the speculators who entered crypto-investing in 2021 are now capitulating.

When Merge?

Beyond the technicals, another headwind facing Ethereum is its persistent upgrade delays. For those who are unaware, the Ethereum Foundation has been working to shift Ethereum's consensus mechanism to Proof-Of-Stake (rather than Proof-Of-Work) for over 7 years. This pending upgrade was a major force behind Ethereum's previous bull-run, as many investors believed the improvements would surely occur in 2021.

As 2021 came and went, investors then shifted their sights for March 2022. Well, now it is June and there is still no upgrade. Undoubtedly, this lack of progress has played a major role in Ethereum's recent price decline.

According to currency.com, Ethereum's upgrade is apparently planned for this month:

"The ETH 2.0 launch date - originally planned for a 2019 release - has been pushed back to June 2022 as a security measure to consolidate code and protect the network from malicious attacks."

However, as is observable through Ethereum's recent price decline, the market does not believe any upgrade will occur any time soon.

Key Takeaways

  • Ethereum is in trouble from both a technical and fundamental perspective.
  • Investors should be careful going long ETH until the Fed adopts a more dovish policy.
  • All things considered, we are still bullish on the long-term outlook for Ethereum (there will eventually be another parabolic rally) and we are looking to accumulate the asset below $2,000.

This article was written by

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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