Ethereum Price Falls as Regulation Worries and DApp Usage Investor Sentiment Stands Ahead
Ether (ETH) has been struggling to hold the $2,000 support since November 27 following its third failed attempt to break above $2,100 in 15 days. One should examine whether this decline in Ether's performance comes as broader cryptocurrency market sentiment is declining.
Recent developments such as the US Department of Justice (DOJ) indicating severe consequences for Binance founder Changpeng “CZ” Zhao have contributed to the negative outlook.
In a lawsuit filed Nov. 22 in federal court in Seattle, US prosecutors are asking a judge to review and overturn a judge's decision to allow him to return to the United Arab Emirates on a $175 million bond. The DOJ argued that Zhao would pose an “unacceptable risk of flight and non-appearance” if he was allowed to walk away from the pending US sentencing.
Ethereum DApps and DeFi face new challenges.
The recent $46 million KyberSwap exploit on November 23 further dampened demand for decentralized finance (DeFi) applications on Ethereum. While it has already been audited by security experts, including a couple in 2023, the incident has raised concerns about the security of the entire DeFi industry. Fortunately for investors, the attacker expressed his willingness to return some of the money, but the incident highlighted the vulnerability of the sector.
Additionally, investor confidence was shaken in a Nov. 21 blog post from Tether, the firm behind the $88.7 billion stablecoin USD Tether (USDT). The Post reported that the US Secret Service had recently joined the forum and hinted at future involvement from the Federal Bureau of Investigation.
The lack of details in the announcement led to speculation about the tight regulatory landscape of cryptocurrencies, particularly Binance facing heightened scrutiny and Tether's cooperation with authorities. While these factors contribute to Ether's underperformance, various indicators on the chain and in the market point to a decline in demand for ETH.
Investors will be cautious as ETH's on-chain data reflects weakness
According to CoinShares, Ether exchange-traded products (ETPs) saw only $34 million inflows last week. This figure is a modest 10% of the revenue seen by comparable Bitcoin (BTC) crypto funds over the same period. The approval of exchange-traded funds (ETFs) between the two assets in the US makes this difference particularly interesting.
Additionally, Ethereum's current 7-day average annualized yield of 4.2% is less attractive compared to the 5.25% return offered by traditional fixed income assets. As reported by StakingRewards, this divergence led to a massive outflow of $349 million from Ethereum shares last week.
High transaction costs continue to be a challenge, with a seven-day average transaction fee of $7.40. This cost has negatively impacted demand for decentralized applications (DApps), causing the volume of DApps on the network to drop 21.8% last week, according to DappRadar.
Notably, while most Ethereum DeFi applications have seen a significant drop in activity, rival chains such as BNB Chain and Solana have seen an 11% increase and stable activity, respectively.
Related: Changpeng Zhao may not leave US pending court review, says judge
As a result, according to Difilama, the Ethereum network protocol fee has decreased for four consecutive days, reaching $5.4 million on November 26, and averaging $10 million per day from November 20 to November 23. This trend can create a negative spiral that leads consumers to competing chains for better products.
Ether's current price reversal on November 27 reflects growing concerns over regulatory challenges and the potential impact of exploits and bans on the stablecoin used in DeFi applications.
The increasing involvement of the DOJ and FBI with Tether raises strategic concerns for liquidity pools and the entire Oracle-based pricing model. While there is no reason for panic selling or a potential drop to $1,800, the lack of interest from institutional investors, as indicated by ETP flows, is certainly not a positive sign for the market.
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.
