So the Merge happened, and ETH is down $300 since. That was not in the script, was it?
All the talk of "supply down lots" and "muh deflationary ETH"...was it all just another round of whales dumping on you?
Let's look into why ETH dumped post-Merge, what fundamentals have changed for the network, and what fundamentals still need to change if ETH is to deliver on five-figure price targets.
What happened to ETH after the Merge
First, let's take stock of the price action. Right after the Merge, ETH wasted little time in dumping below $1,400, where it's been chopping ever since.
Maybe we weren't expecting ETH to melt faces straight away, but surely this is not going according to plan?
Interestingly, as Bloomberg's crypto market analyst Jamie Coutts analyzed, demand-side metrics actually improved following the Merge. Active addresses increased, as did transaction count:
Coutts notes that active addresses are in the 87th percentile compared to the last three years (64th percentile for tx count). In other words, since October 2019, only four out of 36 months had more active Ethereum addresses than now.
He also quotes Raoul Pal's Ethereum Network Value model (active addresses x transaction USD value) as showing a possible bullish divergence:
Furthermore, ETH issuance is down, as the supply has dropped over 90% (as promised):
ETH even had its first "ultra-sound day" recently (meaning its first deflationary issuance day):
On the surface, all these factors point to positive developments for Ethereum. But digging a little deeper shows where it's all going wrong.
Why Ethereum is stuck in a rut
If you take another look at the Ethereum Network Model, you can easily spot why its predictive ability is limited. Just take a look at the spike in the network value before June 2021:
Of course, May 2021 was the peak of the bull market, with ETH trading north of $4,000. Small wonder that the transaction value and active addresses were peaking at a time when everyone and their mother was chasing the next hot shitcoin. However, only having an active address tells us little about the fundamental demand for Ethereum's commodity: blockspace.
Demand for blockspace can easily be proxied by network fees. Since blockspace is a limited commodity, network fees will rise in times of high demand — but they have actually been falling for quite a while now:
Network fees surged in the 2017 bull market and were flat during the bear market. After another surge until mid-2021, they have been sliding back to bear market levels since.
In fact, zooming in on network fees tells us that the DeFi-powered bull market has faded away almost entirely. Ethereum's network fees are trending towards the same levels they were at before DeFi (and NFT mints) existed:
Total fees are down 90% from bull market levels, as indicated in the first three rows of Messari's analysis:
So was it all a fad?
Yes. And no. Well, it's complicated.
Firstly, the macro is to blame. Yes, here we go again. Macro.
The abridged version is that macroeconomic conditions mean money is flowing out of DeFi and NFTs. Which means less demand for Ethereum blockspace, lower fees, and thus less demand for ETH itself.
To quote Arthur Hayes, as long as the white line in the graph below doesn't go up (more USD in the markets), the green and yellow lines won't react, and neither will ETH.
Another fundamental factor is L2 scaling.
Or more precisely, layer-two solutions cannibalizing the demand for Ethereum blockspace. The transaction count on Optimism and Arbitrum has grown steadily and stands at over 20% now:
However, that's transactions leaving Ethereum and going to Optimism and Arbitrum. But at the same time, the number of daily transactions are flat, meaning there is not more demand for blockchain transactions per se.
Macro analysts like Lyn Alden warned that L2 scaling may not be fundamentally bullish for the price of ETH. If the supply of Ethereum-related blockspace (via L2/L3 scaling) outpaces the demand for Ethereum blockspace (through rollups on the L1) and the token sinks (staking ETH and purely speculative demand), more users might not lead to the surge in ETH you think it does.
Of course, a few weeks of data is not nearly enough to judge. But it is a trend to keep an eye on.
Finally, the SEC FUDd did not help ETH's cause either.
Whether ETH is or isn't a security will not be conclusively determined in the near term anyway. But Gary Gensler speaking his mind on how it could not be poked at a market that's already on pins and needles.
Quo vadis, Ethereum?
The short-term picture looks bleak or maybe not. It's hard to tell, and prediction market Polymarket puts the chances of ETH dipping below $1,000 before November at almost 50/50:
While the supply reduction is fine and dandy, ETH is still at the mercy of BTC, which is at the mercy of the NASDAQ, which is at the mercy of the Federal Reserve. Nothing has changed, and the crypto markets are still a small fish in a massive pond.
If you accumulate, do so with caution.
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators.
This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.
The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap.
CoinMarketCap is not responsible for the success or authenticity of any project, we aim to act as a neutral informational resource for end-users.