Ether’s price has been struggling to maintain its $1,800 support level since May 12, and investors are facing pressures from a worsening regulatory environment for cryptocurrencies. The United States Securities and Exchange Commission (SEC) recently responded to Coinbase’s petition for clear crypto regulation, stating that rulemaking may take years, and enforcement actions will continue in the meantime. On the other hand, the Economic and Financial Affairs Council of the European Union approved the Markets in Crypto-Assets (MiCA) regulation, which will come into effect in mid-2024. While some argue that MiCA will facilitate business growth in the region, others point out privacy risks for personal users’ data and risks imposed on non-custodial solutions, including decentralized finance applications.
Declining Demand for Decentralized Applications
The Ethereum network’s high gas fees, which are the cost associated with transactions, including those performed by smart contracts, is causing problems. For the past four weeks, the average transaction fee has been above $9, severely limiting the demand for decentralized application usage. Total deposits on the Ethereum network in Ether terms have plummeted to their lowest levels since August 2020. According to DefiLlama data, Ethereum DApps reached 14.9 million ETH in total value locked (TVL) on May 16, a 10% decline from two months prior. On the other hand, TVL on BNB Smart Chain in BNB terms was flat in the same period, while Polygon deposits on the Polygon network increased by 29%.
Declining Market Share on Decentralized Exchanges
Ethereum has been the leader in decentralized exchange (DEX) volume since its inception, but its position is being challenged. Ethereum’s market share by volume on DEXs peaked at 75% in the week ending March 5 but steadily declined to its lowest level ever, 39.6%, in the week ending May 14. Meanwhile, Arbitrum and BNB Smart Chain have been gaining market share on DEX trading volume, increasing to 14% and 31%, respectively.
Lack of Leverage Buying Demand
Ether quarterly futures are popular among whales and arbitrage desks, but these fixed-month contracts typically trade at a slight premium to spot markets, indicating that sellers are asking for more money to delay settlement. Moreover, Ether professional traders have avoided leverage longs (bullish bets) since early April. The current 1% ETH futures premium is on the edge of becoming negative, known as backwardation, which is an alarming red flag as bearish demand dominates the scene.
In summary, the reduced TVL, record-low DEX market share, and lack of leverage buying demand all signal that the $1,900 resistance level will be challenging to break in the short term. Ether bears are currently in control, favoring the odds of a price correction.