• Ethereum’s price decline is attributed to reduced chances of a spot Ethereum ETF approval and concerns over inflation in the U.S.
  • Regulatory uncertainty surrounding ETF approval and weakened network activity further exacerbate Ethereum’s price decline.
  • Factors such as decreased network usage and a significant decrease in the Ethereum burn rate contribute to the bearish trend.

Ethereum’s price is currently experiencing a decline due to several factors, including the postponement of a spot ETH exchange-traded fund (ETF) launch in the United States, reduced network usage, and a significant decrease in the ETH burn rate.

Threat of sticky inflation in the U.S.

Investor sentiment has been further dampened by remarks from Susan Collins, the Boston Federal Reserve Chair, hinting at persistent inflation possibly necessitating prolonged higher interest rates. Collins’ speech on May 8 emphasised the necessity for slower economic growth to alleviate demand pressures. While the potential adverse effects on corporate earnings could benefit alternative assets like cryptocurrencies, fears of a substantial recession may lead many investors to seek refuge in fixed-income and cash positions. The surge in stock buybacks in the U.S. market, primarily driven by well-capitalised companies, complicates ETH’s recovery trajectory. Despite potential earnings growth, buybacks alleviate selling pressure and offset a stagnant economy.

Also read: Ethereum ETF: What you need to know

Reduced likelihood of spot Ethereum ETF approval

While Ethereum’s performance may be influenced by the 3% correction in the total cryptocurrency market capitalisation since May 6th, other altcoins like BNB, Tron, Cardano (ADA), and Litecoin (LTC) have outperformed ETH by 3% or more during the same period. Even when compared to Bitcoin (BTC), ETH’s price lagged by 1.5%. Reduced likelihood of spot ETH ETF approval may be a specific factor negatively impacting ETH’s price.

The possibility of an Ethereum U.S. ETF approval was dampened following the SEC’s decision to postpone its decision on the Invesco and Galaxy Digital proposal until July 2024. Furthermore, the refusal of U.S. SEC Chair Gary Gensler to clarify Ethereum’s classification as a security during his appearance on CNBC’s Squawk Box on May 7 has further eroded investor confidence in the ETF’s prospects. Gensler’s appearance followed six crypto-related lawsuits in 2024.

Also read: SEC faces allegation about Ethereum regulation

Decreased network usage and burn rate

Recent on-chain analysis for Ethereum has yielded unfavourable results. According to ultrasound.money, the burn mechanism for ETH has reached its lowest levels in 2024.

The EIP-1559 protocol burns a fraction of gas fees per transaction, leading to higher ETH supply growth in times of lower network demand. The latest data shows an ETH 4,207 burn in 7 days, significantly lower than the ETH 17,623 issued in the same period. Although the 13,416 ETH supply increase in the past 7 days represents a mere 0.58% annualised inflation, concerns over Ethereum’s diminished network usage become more pronounced when considering its second layer scaling solutions.

The decline in Ethereum’s demand has impacted its ecosystem, including projects like Arbitrum, Base, Polygon, and ZkSync Era. In contrast, Solana and Thorchain have demonstrated increased activity. Similarly, Sui and Avalanche experienced a comparatively smaller decline in decentralised exchange (DEX) volumes compared to other platforms.

The precise reasons behind investors’ decisions to sell ETH remain unclear. However, there appears to be reduced confidence in the U.S. approving an Ethereum spot instrument. Additionally, recent network health metrics for Ethereum have deteriorated. The uncertainty surrounding recent regulatory actions against the crypto industry, including Consensys, may also help explain the weakness in Ethereum’s price.