Key takeaways:
- Negative $ETH futures funding rates and six weeks of spot ETF outflows highlight a fragile investment climate.
- Ethereum’s 53% market share in DeFi keeps it well-placed for a recovery, even as negative news continues to batter the network.
Ether ($ETH) price faced a 5% correction on Tuesday, erasing gains from the previous 12 days. The move triggered $170 million in liquidations of bullish leveraged $ETH positions, putting traders on alert. Disconcerting news that the Ethereum Foundation was laying off 20% of its staff contrasts with optimism surrounding an upcoming network upgrade, but should $ETH traders be worried?
$ETH perpetual futures annualized funding rate. Source: Laevitas
Demand for bearish $ETH positioning briefly surged on Tuesday as the perpetual futures annualized funding rate flipped into deeply negative territory, meaning shorts (sellers) paid to keep their positions open. The current 3% level signals a lack of confidence from bulls, but it should not come as a surprise given Ether’s recent weakness.
$ETH/USD (orange) vs Total crypto capitalization (blue). Source: TradingView
Ether price declined by 20% over 30 days, slightly worse than the 17% drop in the broader cryptocurrency market capitalization. Part of the move ties to investors’ fear over ongoing peace negotiations between the US and Iran. Moreover, high costs of artificial intelligence build-out have led investors to act more cautiously.
Ethereum leads DeFi even as activity slumps
The overall weakness in the decentralized applications (DApps) industry has led multiple projects to shut down, while the aggregate total value locked (TVL) shrank by 23% in three months. Lower demand for blockchain data processing weakens the case for $ETH investment, although the Ethereum network’s leadership in TVL and activity should not be understated.
Blockchains ranked by Total Value Locked, USD. Source: DefiLlama
Ethereum’s $38 billion decentralized finance (DeFi) TVL represents a 53% market share, signaling institutional investors’ preference. Additionally, when including its layer-2 scaling solutions, the Ethereum ecosystem accounts for 43% of decentralized exchange (DEX) volumes. However, Ethereum faces criticism for relatively low 30-day fees of $11 million.
Despite controlled $ETH issuance at 0.8% equivalent annual inflation, the staking reward rate was 2.7%, lower than the US money market yield. Adding to investors’ concerns, the publicly listed company BitMine (BMNR US) held $9.3 billion in unrealized losses on its $ETH reserves. The company, led by its Chairman Tom Lee, continues to increase its position.
Even though there is no imminent risk of BitMine being forced to reduce its $ETH holdings, the situation likely deters institutional investors’ appetite. More concerningly, US-listed Ether spot exchange-traded funds (ETFs) posted net outflows for six consecutive weeks. Regardless of the rationale behind the move, the constant selling pressure undermined traders’ sentiment.
Related: Morgan Stanley amends Ethereum, Solana ETFs to reveal record cheap fees
US-listed spot Ether ETFs weekly net flows, USD. Source: SoSoValue
A total of $910 million has left the US-listed spot Ether ETFs since mid-May, reducing total net assets to $9.4 billion. The downturn in the cryptocurrency market coincided with the Ethereum Foundation’s (EF) organizational restructuring due to a 40% budget cut. The EF announced on Tuesday that 20% of its workforce was let go.
Still, Ethereum’s development does not depend solely on EF’s work, and the upcoming Glamsterdam protocol upgrade is expected to reduce centralization by splitting block creation while improving security and execution efficiency through parallel transaction processing.
At least in relative terms, $ETH stands well-positioned to capture the eventual comeback in DApp demand, given the Ethereum network’s dominance in institutional investor activity.
