Why is the Ethereum (ETH) price underperforming the overall cryptocurrency market?

The Ethereum (ETH) price fell 5.2% between September 3 and September 4 after a strong rebound from the $2,550 resistance level, closing above that level for the first time in eight days.

Traders are now concerned that Ether could underperform even if the broader crypto bull market resumes, as the incentives for fixed income in the U.S. are expected to diminish. So what exactly is putting pressure on Ether’s price?

Will Ether Fall When the Tech Bubble Bursts?

While some market participants may attribute the underperformance of cryptocurrencies to traditional financial market conditions, Ether also faces unique challenges, including low network fees, unattractive staking rewards, and weak demand for its recently launched spot exchange-traded fund (ETF) product. It is therefore worth exploring whether these factors will continue to drive down Ether’s price in the future.

From a macroeconomic perspective, there is uncertainty surrounding the outcome of the Federal Reserve’s interest rate cuts, which are expected to begin in September. Esther George, former president of the Kansas City Federal Reserve Bank, told Yahoo Finance that while there is still hope for inflation to reach 2%, the Fed’s credibility could be called into question, especially if the jobs market weakens.

Philadelphia Federal Reserve Bank President Patrick Harker also said the Fed could become more aggressive in its rate cuts if the labor market worsens. While more expansive monetary policy generally favors risk-taking markets, if investors are concerned that a recession is coming, demand for safe assets could surge, prompting traders to seek refuge in safer investments, which could have a negative impact on Ether’s price.

Traders are particularly concerned about the technology sector, especially after Nvidia shares lost a record $279 billion in market capitalization on September 3. The chipmaker fell 14% in three days after two cautious research reports on the growth of the artificial intelligence sector. In addition, Nvidia received a subpoena on November 3 as part of an antitrust investigation by the U.S. Department of Justice.

However, several unique factors in Ethereum could justify its potential underperformance relative to the broader cryptocurrency space. For example, the decline in activity on Ethereum’s base layer has led to lower fees, which has threatened the sustainability of the network. While some may argue that this reflects the successful adoption of layer 2 scaling solutions, it still represents a risk in terms of long-term incentives.

According to DefiLlama, Ethereum network fees fell to a four-year low of $3.1 million in the week ending August 31. The 88% drop over four weeks has led to criticism of Ethereum’s rewards model. One such criticism, posted by AbstractChain contributor Cygaar, points to the “basically free” cost of data availability for rollups as the reason for the drop.

Cygaar also highlights the relatively low demand for layer 2 solutions due to the lack of “interesting consumer-facing applications” that could help restore healthy levels of fees. The analyst questions whether researchers have overestimated the demand for rollups and whether gas fees are necessary for long-term network security.

Ethereum Network Fees Decrease and Weak Ethereum ETF Flows

In addition to the network fee decline, Ether has also been struggling with spot ETF products, which saw net outflows of $47 million on September 3 alone. In fact, these products have seen outflows of $475 million since they first launched on U.S. markets on July 23. The lack of investor interest is concerning, especially since institutional demand was seen as a key element of Ether’s appeal.

relevant: ETH Re-Staking Surges Due to Annual Staking Rate Reduction — P2P.org

According to StakingRewards, further contributing to Ether’s price decline is its relatively low staking reward of 3.2%, especially considering the current inflation rate of 0.7% per year. The yield is lower than most US Treasury bonds, and the failure to deliver on the “ultrasonic money” narrative promoted by some analysts may have disappointed investors.

Ultimately, there is no indication that the factors affecting Ether’s price, such as decreasing network fees and decreasing demand for spot ETF products, will reverse anytime soon. While this does not guarantee that Ether’s price will remain below $2,550, it does suggest that ETH is unlikely to outperform the broader cryptocurrency market in the short term.