On June 15, Ethereum’s price plummeted by 7%, reaching its lowest level in three months. The altcoin’s drop to $1,620 impacted investors’ perception that it was on track to turn $2,000 into support. Despite its decline, Ethereum’s $196 billion market capitalization remains higher than PetroChina’s $186 billion and close to chipmaker AMD’s $198 billion. Ethereum is the 66th largest global tradable asset, which is impressive given that it is only eight years old and does not provide any direct profit for the project’s maintenance.
However, regulatory pressure and weak demand for decentralized application (DApp) usage on the Ethereum network have subdued investors’ appetite for Ethereum. The Securities and Exchange Commission proposed a rule change regarding the definition of an exchange, which has contributed to the recent price drop. Paul Grewal, the chief legal officer of Coinbase exchange, has opposed the proposed change, claiming that it violates the Administrative Procedure Act.
DApp usage on the Ethereum network has failed to gain momentum despite gas fees plummeting by 75%. The seven-day average transaction cost dropped to $4 on June 14, down from $16 one month prior. Meanwhile, DApp active addresses declined by 18% in the same period, affecting decentralized finance, nonfungible token marketplaces, gaming, and collectibles. However, the total value locked (TVL), which measures the deposits locked in Ethereum’s smart contracts, declined by only 2% versus mid-May to 14.6 million ETH, according to DefiLlama.
To evaluate the chances of Ethereum’s price breaking below the $1,650 support, one should look for a reduced ETH futures premium and increased costs for protective put options. ETH quarterly futures typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement. ETH futures contracts in healthy markets should trade at a 5 to 10% annualized premium, known as contango, which is not unique to crypto markets. Professional traders have been avoiding leveraged longs (bullish bets), as indicated by the futures premium, known as the basis indicator, which remains far from the neutral 5% threshold.
The 25% delta skew indicator, which compares similar call and put options, reflects fear when the protective put option premium is higher than the call options. The skew indicator will move above 8% if traders fear an Ethereum price crash. As displayed above, the delta skew has been signaling fear since June 10 and peaked at 21% on June 15, the highest level in three months.
Investors often focus solely on short-term price movements and forget that Ethereum’s price is up 37% year-to-date in 2023. Additionally, traders may have missed the signals of weakening demand for DApp use by relying too much on Ethereum’s $24 billion in TVL. For now, the bears have the upper hand considering ETH derivatives metrics, so a retest of the $1,560 support is the most likely outcome. However, until the regulatory FUD dissipates, bulls will have a hard time moving Ethereum above the $1,750 resistance.