3 reasons why Ethereum is stuck below $3,900

Ether (ETH) has broken above $3,900 on several occasions in the past seven days, but has failed to sustain this level. The market seems to have expected that the Ethereum exchange-traded fund (ETF) approved by the United States Securities and Exchange Commission (SEC) will rise above the threshold, as Ether's gains were on May 21, two days before the decision.

Ethereum Spot ETF Approval: Not everything turned out as expected

One could argue that spot ETF traders are still waiting for the relevant Form S-1 approval for each fund. Senior Bloomberg ETF analyst Eric Balchunas expects Ethereum spot instruments to begin trading on July 4, while colleague James Seifert said on May 29 that BlackRock's updated S-1 shows that “issuers and the SEC are working to launch an Ethereum ETF.”

However, analysts are hinting that ETH may come under pressure if the experiences of Greyscale Ethereum Trust (ETHE) emerge in the weeks following its conversion to ETFs. A similar issue plagued Greyscale Bitcoin Fund (GBTC) with high fees. Some estimate that grayscale ETHE alone could exceed $100 million per day in the first few weeks, compensating for or even surpassing the revenue from new entrants.

Basically, Ether's failure to break the $3,900 resistance came from the rally that preceded the spot ETF approval. Some investors are disappointed that effective trading takes longer, which has created some uncertainty and a negative price impact. With Ether futures peaking on May 28, this could pose a problem.

$16.8 billion in Ether Futures will result in liquidity risks

Open interest measures the total number of ETH futures contracts available on each of the derivatives, including Binance, CME, OKX and Bybit.

Although the ETH futures (buyers) and shorts (sellers) are always aligned, the higher concept in the game means that the liquidity risk increases significantly. For example, if longs are using 10x leverage, on average, if the price of Ether drops by 10%, these contracts will be forcefully canceled.

If the price of Ether suddenly increases by 10%, the same opposite movement can occur and shorts will use excessive strength. In such cases, the exchanges will automatically buy ETH futures to eliminate their risk and close their positions without margin deposits. As such, the $16.8 billion in open interest in Ether futures poses a risk to potential buyers, which will push Ether's price below $3,900.

Competing networks have outpaced the growth of Ethereum's activity.

Ethereum's high gas fees can be seen as a sign of success, indicating the continued demand for block space. However, they also provide an opportunity to compete with blockchains that focus on high scalability. A part of the activity has moved to Ethereum Layer-2 solutions, but some users and projects are opting for BNB Chain, Solana, or Aptos.

It is naive to think that every DApp needs the level of decentralization that Ethereum provides. Users who engage in simple finance, gambling or gaming are often reluctant to use bridging solutions to access the low-fee environment. Therefore, Ethereum's mainnet size growth falling behind its competitors is generally seen as a missed opportunity.

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Ethereum's 122,350 daily active addresses with DApps (UAW) on May 30 decreased by 2% compared to the previous day. Likewise, the total amount spent on the Ethereum network increased by a little over 2% over the same period. This data shows that despite Ethereum's strong fundamentals, numerous DApp use cases, and diverse investor profiles, there is a trend toward adoption of alternative blockchains.

For example, BNB Chain has 508,610 daily active addresses, four times more than Ethereum. These users have transacted more than $3.5 billion on PancakeSwap in the past seven days, with a single DApp Move Stake collecting more than 226,350 active addresses during the same period. In short, Ethereum's on-chain metrics do not inspire confidence, and further limit Ether's ability to rally above $3,900 in the near term.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.