Ethereum (ETH) is struggling to maintain the $2,000 support as of November 27, after its third attempt to breach $2,100 in 15 days failed. This drop in Ether performance comes as broader cryptocurrency market sentiment worsens.
Recent developments, such as the US Department of Justice (DOJ) signaling potentially serious repercussions for Binance founder Changpeng “CZ” Zhao, have likely contributed to the negative outlook.
In papers filed Nov. 22 in federal court in Seattle, U.S. prosecutors requested a review and reversal of a judge’s decision to allow CZ to return to the United Arab Emirates on $175 million bail. The Justice Department argues that Zhao poses an “unacceptable flight and non-appearance risk” if he is allowed to leave the United States ahead of sentencing.
Ethereum DApps and DeFi face new challenges
The recent $46 million KyberSwap exploit on November 23 further dampened demand for Ethereum’s decentralized finance (DeFi) applications. Despite having previously been audited by security experts, including the couple in 2023, this incident amplified concerns about the safety of the DeFi industry as a whole. Fortunately for investors, the attackers expressed their intention to return some of their funds, but the incident highlighted vulnerabilities in the sector.
Additionally, investor confidence was shaken by a November 21 blog post from Tether, the company that developed the USDT stablecoin. The post announced that the U.S. Secret Service had recently been integrated into the platform and hinted at the involvement of the Federal Bureau of Investigation (FBI).
The lack of details in the announcement led to speculation that the regulatory environment for cryptocurrencies is becoming increasingly stringent. This is especially true as Binance is under heightened scrutiny and Tether is cooperating closely with authorities. These factors are likely contributing to Ether’s poor performance, with various on-chain and market indicators suggesting declining demand for ETH.
Investors have become cautious as ETH on-chain data reflects weakness.
According to CoinShares, the Ether Exchange-Trade Product (ETP) saw inflows of just $34 million last week. This figure represents just 10% of the equivalent Bitcoin (BTC) cryptocurrency inflows over the same period. This difference is particularly noteworthy due to the competition between the two assets for spot exchange-traded fund (ETF) approval in the United States.
Moreover, Ethereum staking’s current 7-day average annual return of 4.2% is less attractive than the 5.25% return offered by traditional fixed income assets. This gap led to a significant outflow of $349 million from Ethereum staking last week, according to a report by StakeRewards.
High trading costs continue to be a problem, with a 7-day average trading fee of $7.40. These costs have negatively impacted demand for decentralized applications (DApps), leading to a 21.8% drop in DApp volume on the network last week, according to DappRadar.
In particular, most Ethereum DeFi applications have seen significant declines in activity, while competing chains such as BNB Chain and Solana have experienced steady activity and increases of 11% each.
RELATED: Changpeng Zhao may not be able to leave the U.S. while awaiting court review, judge says.
As a result, Ethereum network protocol fees declined for the fourth consecutive day, reaching $5.4 million on November 26, compared to a daily average of $10 million between November 20 and November 23, as reported by DefiLlama. This trend could potentially create a negative spiral, driving users to competing chains in search of better returns.
Ether’s current price decline on November 27 reflects growing concerns over regulatory issues and the potential impact of abuses and sanctions on stablecoins used in DeFi applications.
DOJ and FBI’s increasing involvement in Tether increases systemic risk to liquidity pools and the entire oracle-based pricing mechanism. There is no immediate cause for panic selling or concerns of a decline to $1,800, but lackluster demand from institutional investors, as evidenced by ETP flows, is certainly not a positive sign for the market.
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.