Ethereum (ETH) has hit above $3,900 several times over the past seven days but has been unable to maintain this level. The market appears to have expected an upward trend because the U.S. Securities and Exchange Commission’s (SEC) approval of the spot Ethereum exchange-traded fund (ETF) occurred on May 21, two days before the decision.
Ethereum Spot ETF Approved: Not Everything Turned Out As Expected
Spot ETF traders may argue that they are still awaiting Form S-1 approval for each fund. Bloomberg ETF analyst Eric Balchunas expects the Ethereum spot product to begin trading by July 4, and his colleague James Seyffart said in BlackRock’s May 29 updated S-1 that “the issuer and the SEC are considering a spot Ethereum ETF.” He pointed out that this shows that “efforts are being made to release it.”
However, analysts suggest that ETH could come under pressure if the Grayscale Ethereum Trust (ETHE) experiences outflows in the weeks following its conversion to an ETF. A similar problem plagued Grayscale’s Bitcoin Fund (GBTC) due to its high fees. Some speculate that grayscale ETHE outflows alone could exceed $100 million per day in the early weeks, offsetting or even exceeding the influx of newcomers.
Essentially, part of the reason Ethereum failed to break the $3,900 resistance level came from the rally that preceded the approval of the spot ETF. The fact that some investors are frustrated that effective trading is taking longer has also created uncertainty and negative price implications. This could spell trouble, as Ethereum futures open interest rose to an all-time high on May 28.
$16.8 billion worth of Ether futures are at risk of liquidation.
Open interest measures the total number of ETH futures contracts available on all derivatives exchanges, including Binance, CME, OKX, and Bybit.
Buyers and sellers of ETH futures are always aligned, but higher notional value means liquidation risk increases exponentially. For example, if the buyer uses 10x leverage on average, if the price of Ether falls 10%, the contract will be liquidated.
A similar opposing move could occur if the price of Ether suddenly rises 10% and shorts use excessive leverage. In such cases, the exchange will automatically purchase ETH futures to de-risk and close positions short of the corresponding margin deposit. As a result, Ether’s futures open interest of $16.8 billion creates risk for potential buyers, keeping the price of ETH below $3,900.
Competitive networks outpaced Ethereum’s increase in activity.
Ethereum’s high gas fees can be seen as a sign of success, indicating continued demand for block space. However, it also presents opportunities for competing blockchains focused on high scalability. Some of the activity has migrated to Ethereum layer-2 solutions, but some users and projects are choosing BNB Chain, Solana, or Aptos.
It would be naive to assume that all decentralized applications (DApps) require the level of decentralization that Ethereum provides. Users involved in simple finance, gambling or gaming are often reluctant to use bridge solutions to access low fee environments. Therefore, when Ethereum mainnet volume growth lags its competitors, it is generally considered a missed opportunity.
Related: Ethereum ETF becomes Web3 growth ‘call option’ – Cryptocurrency analyst
Ethereum’s daily active addresses associated with DApps (UAW) of 122,350 were down 2% on May 30 compared to the day before. Likewise, the total volume transacted on the Ethereum network was only 2% over the same period. This data shows that despite Ethereum’s strong fundamentals, diverse DApp use cases, and diverse investor profile, there is a trend towards adoption of alternative blockchains.
For example, the BNB chain’s daily active addresses of 508,610 are more than four times higher than Ethereum. These users have traded more than $3.5 billion on PancakeSwap over the past seven days, with a single DApp, Move Stake, amassing over 226,350 active addresses over the same period. Simply put, Ethereum’s on-chain metrics do not inspire confidence, further limiting Ethereum’s chances of breaking above $3,900 in the near term.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.