Why Has The Ethereum (ETH) Price Dropped?

Increased tensions between Iran and Israel, coupled with growing bullish positions on the dollar, have amplified investor aversion to risk, resulting in a decline in Ether prices.

Source: www.ekonomim.com

The price of Ethereum's native token, Ether, experienced a 3.45% decline on April 16, reaching $2,990. This drop is part of a correction that commenced on March 11, when ETH reached a three-year peak of $4,095. Subsequently, the cryptocurrency has retracted by 27%, reflecting broader declines in the crypto market. Initially perceived as a typical correction within a bull market, suggesting profit-taking at Ether's recent peaks, the downturn in ETH/USD has been further exacerbated by escalating geopolitical tensions in the Middle East and increasing prospects of prolonged high-interest rates in the U.S. 

The Prevailing Risk-Averse Sentiment Is Weighing On The Price Of ETH

Today's decline in Ether's price coincides with Israel's announcement of forthcoming retaliation against Iran, signaling an escalation in geopolitical tensions in the Middle East. This bearish market reaction mirrors what occurred over the weekend when Iran conducted drone and missile attacks against Israel. These attacks prompted a widespread market retreat, with Bitcoin nearing $60,000 and several altcoins seeing declines of up to 30%. The declines seen across the cryptocurrency market indicate a growing sense of risk aversion among investors. This sentiment is being reinforced by the resilience of the U.S. economy, which has diminished the likelihood of interest rate cuts by the Federal Reserve.

For example, as of April 16, CME futures data indicated an 81.5% probability of the Fed maintaining rates unchanged in June, compared to around 50% two weeks earlier. A scenario of prolonged higher interest rates is viewed as bearish by crypto traders. At the same time, the expense of options speculating on additional appreciation in the U.S. dollar has surged to its highest point since November, suggesting a move towards safer assets. This has further subdued purchasing interest in Ethereum and the wider cryptocurrency market today.

Large Ethereum Holders Are Showing Signs Of Panic

The decline in Ether is also attributed to a reduction in ETH holdings among its wealthiest investors, commonly referred to as whales. For instance, since March, there has been a notable decrease in the number of entities holding at least 1 million, 100,000, and 10,000 ETH tokens. Conversely, the number of addresses holding 1,000 ETH has slightly increased, indicating potential compensation for the declines observed in larger holdings. As large holders, or whales, often wield significant influence on market sentiment, their reduction in holdings may be interpreted as a lack of confidence in Ethereum's future prospects. This sentiment shift could potentially lead to a bearish market sentiment and a subsequent price decline.

Mass Liquidation of Ethereum Long Positions

The drop in Ether's price coincided with the liquidation of $73.41 million in perpetual swap contracts, including $58.68 million in long positions. When these long positions are liquidated, the assets they hold are automatically sold off, potentially flooding the market with excess supply and further driving prices down. This surge in liquidations came alongside a notable decrease in open interest for Ethereum, dropping from $14.62 billion on April 9 to $11.07 billion on April 16. Simultaneously, the funding rate saw a minor increase to 0.007% every eight hours, though it remains well below the recent high of 0.094% per eight hours. Despite this slight uptick in funding rates suggesting some optimistic sentiment, it appears insufficient to offset the negative effects of the substantial drop in open interest. This situation illustrates the limited enthusiasm among Ether traders to maintain long positions, which might not effectively support a price rally if overall market engagement continues to wane.

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