ETH Price Crashed Amid ETF Outflows: What’s Next for Ethereum?

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September 11, 2024 08:12 EDT

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Ether (ETH) price plummeted in August due to a combination of factors, including spot Ether ETF outflows, inflationary supply dynamics, and declining network activity. This monthly report delves into these reasons and tries to figure out what the future of Ethereum may look like.

What is Ethereum?

Founded in 2013 by Vitalik Buterin, Ethereum serves as a distributed blockchain computing platform designed for the execution of smart contracts and decentralized applications (dApps). The network enables users to create and innovate extensively with smart contracts, catalyzing the emergence of various assets and industries such as decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), Web3 and beyond. At its core, Ethereum features an execution engine tailored for smart contract processing, known as the Ethereum Virtual Machine (EVM). In addition, Ethereum employs a proof-of-stake (PoS) consensus mechanism, which enhances its scalability and sustainability.

Ether Price Drop: A Perfect Storm of Negative Factors

Ether (ETH), the world’s second-largest cryptocurrency by market cap, experienced a disappointing August, underperforming compared to the broader crypto market.

Starting at $3,192 on Aug.1, the price of ETH dropped to $2,290 on Aug. 5. The cryptocurrency traded sideways for the rest of month, reaching a high of $2,794 on Aug. 24, before closing at $2,517 on Aug. 31, down 21% for the month.

Despite the much-awaited launch of the first spot Ether exchange-traded funds (ETFs) in the United States (U.S.) on July 23, the historical debut has not bolstered Ether’s price. Moreover, ETFs could be a significant reason behind Ether’s price decline since. According to Farside Investors data, ETH ETFs recorded a cumulative $562.5 million worth of net outflows since launch, creating significant additional selling pressure.

Ether’s own supply dynamics could also be a culprit. Data from Ultrasound.money reveals a rise in Ether supply by 69,975 ETH during the last 30 days, valued at over $120.3 million at the time of writing. This translates to a 0.7% annual growth rate over the past 30 days, with a yearly issuance rate of 945,000 Ether exceeding the burn rate of 93,000. This imbalance between issuance and burning could dampen the price, meaning that more ETH are being created than destroyed, further contributing to a potential supply glut.

Ethereum’s biggest upgrade since the Merge, the Dencun upgrade, went live on the mainnet on March 13. This significant milestone promised to significantly reduce the transaction fees of Layer 2 networks and enhance Ethereum’s overall scalability. However, despite these positive advancements, the Ether price has been struggling since the Dencun upgrade, as noted in an Aug. 19 X post by on-chain and market data analytics firm CryptoQuant.

#Ethereum Gas Price Hits New All-Time Low

“Despite the approval of Ethereum ETFs, the price of $ETH has been struggling since the Dencun upgrade. ETH supply has increased by more than 197,000 ETH, and its price has fallen by 35%.” – By @EgyHashX

Link 👇https://t.co/GZ1Dt0NStv pic.twitter.com/PtbjWGyUzc

— CryptoQuant.com (@cryptoquant_com) August 19, 2024

The macroeconomic developments also play a role. The U.S. Federal Reserve’s anticipated interest rate cuts, while potentially favorable for risk-on markets, could be tempered by concerns about a looming recession. If investors fear a downturn, they may shift towards safer assets, negatively impacting Ether’s price. The recent volatility in tech stocks, exemplified by Nvidia’s significant market capitalization loss, adds to this uncertainty.

Ethereum’s On-Chain Metrics Reveal Challenges

Ethereum’s specific characteristics also contribute to its relative underperformance. The reduced activity on its base layer, leading to lower fees, might signal the success of Layer 2 scaling solutions but also poses risks for long-term incentives. These factors also suggest that Ether’s price may continue to face headwinds in the near future.

Ethereum’s network fees have been on a downward trend since June 8, when the average daily transaction fee reached $6.23. On Sep. 2, the transaction fee hit a new low of $0.94. To put this figure into perspective, the average daily transaction fee on March 10 (before the Dencun upgrade) was $25.15, which represents a 96% decline in less than six months.

This decrease reflects the growing efficiency of the network and the increasing adoption of Ethereum Layer 2 solutions. However, while lower fees are generally seen as positive for users, they also reduce block validators’ revenue. Stakers earn rewards based on the fees collected by the network. As transaction fees have decreased, staker revenue has also dropped.

According to data from The Block, staker revenue fell from $246.93 million in March 2024 to $190.06 million in August, a decline of over 23%, which could potentially discourage staking and lead to a decline in network security.

Ethereum has also seen a steady decline in its market dominance. As of Sep. 9, Ethereum’s dominance has fallen to a level lower than it was in April 2021, and currently stands at approximately 13.56%.

According to CryptoQuant’s report from Sep. 4, since Ethereum switched to a Proof-of-Stake (PoS) network, an upgrade known as The Merge, ETH/BTC has fallen 44% to its lowest level since April 2021. Even after the approval of the spot Ether ETF in the U.S., Ethereum underperformance has continued, falling 18% since July 23.

#Ethereum is down 44% against #Bitcoin since The Merge in Sept 2022.

ETH/BTC is now at 0.0425, the lowest since April 2021. pic.twitter.com/ogPk0SqEmB

— CryptoQuant.com (@cryptoquant_com) September 6, 2024

Ethereum’s activity has been declining, with both transaction count and active wallet addresses showing a drop. The network’s transaction volume fell to a five-month low on Aug. 22, with the seven-day moving average (7DMA) settling at 1.06 million transactions per day. In August, the total number of transactions reached 33.96 million, a decrease of 4% compared to July.

The number of active wallet addresses reached a nine-month low of around 405k on Aug. 13. Overall, the total number of active addresses on Ethereum has been on a downward trend since March 2024. In March, the network recorded a peak of 17 million active addresses. However, this number has steadily declined, reaching 13.38 million in August. This represents a 5% decrease compared to July and a significant 21% decline compared to the March peak.

While the overall activity on Ethereum has been declining, there is a glimmer of hope in the number of new addresses created. In August, the number of new Ethereum addresses remained relatively stable compared to July, reaching 2.8 million.

However, this figure is still lower than the levels seen in May and June. On June 27, the number of new addresses (7DMA) reached a peak of 138.62k. Since then, there has been a downward trend, with Aug. 8 seeing a low of 80.02k. This suggests that while new users are still joining the Ethereum network, the rate of growth has slowed down.

The stability of new address creation in August could be seen as a positive sign, indicating that there is still interest in Ethereum despite the declining activity. However, the overall trend since June suggests that the network is not attracting new users at the same pace as it did earlier in the year.

In August, Ethereum experienced a decline in trading activity. According to The Block’s data, the 7DMA of daily trading volume on the Ethereum network decreased by approximately 18% compared to the previous month. Specifically, the 7DMA of trading volume fell from $134.71 billion in July to $109.95 billion in August.

Ether ETFs: Outflows Dominate, But BlackRock Makes a Splash

In August, spot Ether ETFs recorded nine straight days of outflows (between Aug. 15 and 27), their longest period of continuous outflows since they launched on July 23.

Most of the investments made by the recently approved nine spot Ether ETFs have been overshadowed by outflows from the Grayscale Ethereum Trust (ETHE), which have exceeded over $2.693 billion as of Sep. 9.

ETHE experienced outflows every day in August, except on Aug. 12 and Aug. 30, when the Grayscale fund reported no total inflows or outflows, according to Farside Investors data.

However, inflows into BlackRock’s iShares Ethereum Trust ETF (ETHA), Fidelity Ethereum Fund (FETH) and Bitwise Ethereum ETF (ETHW) helped to mitigate the damage. ETHA also became the first spot Ether ETF to reach $1 billion in net inflows on Aug. 20. In total, spot Ether ETFs currently have negative net flows of $573.7 million.

BlackRock’s Ether ETF Debuts on Brazilian Stock Exchange

BlackRock is expanding its cryptocurrency product offerings globally. On Aug. 28, the company listed its Ethereum ETF on Brazil’s B3 stock exchange through a depositary receipt. This move allows retail and institutional investors in Brazil to trade the iShares Ethereum Trust (ETHA) using the ticker ETHA39.

A depositary receipt is a security that represents shares in a foreign company or fund. It is traded in the local currency and backed by the underlying asset. As BlackRock introduces its Ether ETF to the Brazilian market, the shares will be offered at a price equivalent to one-third of their original value.

The management fees will be set at 0.25% per year, similar to those charged in the United States. However, during the first year of trading or until the ETF reaches $2.5 billion in assets under management (AUM), these fees will be reduced to 0.12%.

Temporary Setback for Crypto ETF Options

On Aug. 13, the New York Stock Exchange (NYSE) American and Nasdaq International Securities Exchange (ISE) withdrew their applications for options trading on Bitcoin and Ether ETFs. This decision follows similar withdrawals made earlier in August, indicating a potential delay in the launch of crypto ETF options in the United States.

Bloomberg analyst James Seyffart seems hardly surprised: “I’m expecting them to re-file over the coming days or weeks like we saw from CBOE.”

NASDAQ & NYSE have joined CBOE in withdrawing their applications for allowing options to trade on the Bitcoin ETFs. I'm expecting them to re-file over the coming days or weeks like we saw from CBOE. https://t.co/8trtqNBVTx pic.twitter.com/YC1U2SgAVA

— James Seyffart (@JSeyff) August 15, 2024

Ethereum Ecosystem: A Month of Wins and New Players

August was a significant month for the Ethereum ecosystem, marked by increased developer activity, institutional adoption and innovative use cases.

21.co Introduces Bitcoin Wrapper on Ethereum

21.co, the company behind cryptocurrency asset manager 21Shares, launched its own version of a wrapped Bitcoin on the Ethereum blockchain. This new token, called 21.co Wrapped Bitcoin (21BTC), was announced on Sep. 3 and joins 21.co’s existing suite of wrapped tokens for Avalanche (AVAX), Polkadot (DOT), and Solana (SOL) on Ethereum.

Institutional Interest Heats Up

Leading financial institutions are expanding their cryptocurrency services, adding Ether to their list of digital assets.

On Aug. 1, Futu Securities International, Hong Kong’s largest online brokerage, launched Ether and Bitcoin trading for its 22 million customers. The decision makes Futu Securities the first brokerage to directly offer crypto trading to Hong Kong-based retail investors.

Zurich Cantonal Bank, one of Switzerland’s largest banks, also announced on Sep. 4 that it would now provide trading and custody services for Ether and Bitcoin.

Ripple’s Stablecoin on Ethereum

On Aug. 9, the cross-border payment company Ripple started testing its stablecoin Ripple USD (RLUSD) on two blockchain networks – XRP Ledger and Ethereum.

However, the company cautioned that RLUSD has “not yet received regulatory approval and therefore is not available for purchase or trading”.

Testing, testing…RLUSD! We’re excited to share that Ripple USD (RLUSD) is now in private beta on XRP Ledger and Ethereum mainnet. RLUSD has not yet received regulatory approval and therefore is not available for purchase or trading – please be cautious of scammers who claim they…

— Ripple (@Ripple) August 9, 2024

Argentina’s Ministry of Education partnered with ETH Kipu to integrate Ethereum into the high school curriculum in Buenos Aires.

The ETH Kipu Foundation collaborated with the city to introduce Ethereum and blockchain technology to high school classrooms. As part of this initiative, high schools in Buenos Aires will also offer blockchain internships to provide students with hands-on experience.

The first course in the program started on Aug. 27.

Ethereum Researcher Growth Spikes

Ethereum has seen a significant increase in researcher activity. According to an Aug. 29 X post by Electric Capital engineer Emre Caliskan, the number of researchers working on the Ethereum network increased by over 2,100% from Q1 2019 to Q1 2024.

The real Ethereum bull run isn't price – it's brainpower. 1500% growth in researchers since 2019.

Hard to bet against the collective brainpower of this ecosystem. pic.twitter.com/S1F0eFuDpm

— Emre ⚡ (@n4motto) August 29, 2024

The growth in researcher activity is a positive indicator for Ethereum’s future. The network’s innovation pace is directly linked to the number of individuals contributing to its development. While there was a slight decline in developer numbers in Q2 2024, the overall brainpower behind Ethereum remains robust.

Ethereum also continues to lead the blockchain industry in terms of developer activity. As of July 1, the network had over 26,037 monthly developers, including 7,661 full-time developers, according to data from the Developer Report.

Beyond Ethereum Mainnet: Layer 2 Solutions Drive Up Transaction Volume

The Ethereum network continues to lead in terms of total value locked (TVL) and transaction volume. However, Ethereum’s DEX dominance has been gradually declining. According to DefiLlama, Ethereum’s DEX market share has fallen to 31.7% in August 2024, a significant decrease from the 51.08% it held in August 2023.

Impressive Activity Across Ethereum Layer 2 Solutions

Ethereum’s Layer 2 ecosystem continued to thrive, significantly outpacing the base blockchain in terms of activity. According to L2Beat data, Xai and Base have processed the most translations – over 286.9 and 122.6 million transactions in the past 30 days, respectively, dwarfing Ethereum’s 32.9 million.

Other Layer 2 solutions such as Taiko and Arbitrum also showed impressive activity, with 65.1 and 50 million transactions, respectively, in the same period.

​​Polygon and Optimism, two prominent Ethereum-based Layer 2 solutions, experienced a significant surge in developer activity in August. Their contracts per deployer 30-day moving averages increased by approximately 7.9x and 4.8x, respectively.

However, despite this developer enthusiasm, the native tokens of Polygon (MATIC) and Optimism (OP) have underperformed. Both tokens have declined by 15% and 14%, respectively.

August’s highlights for Ethereum were also Symbiotic and Magpie Ecosystem. Symbiotic, a restaking solution that launched its devnet on Ethereum in Aug. 12, offering a customizable staking platform for blockchains, reached $1.58 billion in deposits. Similarly, the Magpie Ecosystem, a decentralized finance and yield platform, surpassed $1.37 billion in TVL.

Lido and Uniswap Lead Despite Falling Fees

In August, monthly DeFi protocol fees fell 24.4% from July to the lowest level since February.

August’s fees of $288.38 million were significantly lower than July’s $381.45 million and March’s $494.14 million. While August’s fees remained above February’s $265.18 million, the overall trend indicates a decline in DeFi activity.

Lido, the Ethereum-based liquid staking solution, and Uniwap led the DeFi protocols in terms of fees collected, accumulating $76.18 million and $46.06 million, respectively,

MATIC to POL: Polygon 2.0 Upgrade Drives Increased Activity

On Sep. 4, Polygon successfully executed a key technical upgrade, marking the transition to Polygon 2.0 that can explain the increased activity on Polygon in August.

As part of this upgrade, the network’s native cryptocurrency, MATIC, was swapped for the new POL token on a 1:1 basis. This means that every MATIC token held by users was automatically converted into POL tokens.

The POL token will now serve as the network’s primary gas token, used to pay transaction fees. Additionally, it will also be the staking token for securing the Polygon network and participating in governance.

The utility:

– Native gas & staking token for Polygon PoS
– Fueling the grants ecosystems & Community Treasury
– Validator rewards
– Governance
– Providing network security for services such as sequencing, ZK proof generation, participation in DACs and more (subject to community…

— Polygon | Aggregated (@0xPolygon) September 4, 2024

Starknet’s Parallel Execution Upgrade

Starknet, a decentralized Layer 2 scaling solution built on top of Ethereum, released a major upgrade known as version 0.13.2 on Aug. 28. This update introduces parallel execution to the Starknet network, marking a major milestone for Ethereum’s scaling capabilities.

Parallel execution allows Starknet to process multiple transactions simultaneously, which can improve transaction speed and reduce latency, making Starknet a more attractive option for developers and users.

2-second txs are here 🔥

Parallel Execution and Block Packing are now live on Starknet mainnet!

With higher TPS capacity, more frequent blocks and faster tx confirmation time, Starknet is now smoother than ever.https://t.co/x7oPTYByB4 pic.twitter.com/Z23OKboPlT

— Starknet 🐺🐱 (@Starknet) August 28, 2024

EigenDA Expands Token Support

EigenDA, a data availability protocol built on EigenLayer’s Ethereum restaking platform, now supports native token restaking for Layer 2 scaling networks. In addition to Ether and EigenLayer’s native EIGEN token, “teams can now restake their ERC-20 tokens to secure a custom quorum for their rollup”. This enhances security for rollup users and provides token holders with the opportunity to earn yield.

Introducing Permissionless Token Support Mainnet Launch

What

This feature enables any ERC-20 token to be added as a restakable asset, significantly broadening the scope of assets that can contribute to the security of decentralized networks, and unlocking the cryptoeconomic… pic.twitter.com/tXS5AGSXNs

— EigenLayer (@eigenlayer) August 26, 2024

Status Joins Linea as First Contributor

Linea, a Layer 2 scaling solution built on Ethereum, partnered with Status, a global collective focused on building inclusive digital communities, to launch the Status Network.

This collaboration marks a significant milestone for Linea, as Status will be the first to contribute directly to the project’s open-source codebase. By operating an identical version of Linea in parallel, Status will help strengthen the overall ecosystem and ensure its continued development.

Status has partnered with @LineaBuild to launch our own layer-2: Status Network! 🥳

We want to build the best platform to support a bustling ecosystem, and who better to partner with than the world’s most active and lowest-cost zkEVM L2 blockchain?!https://t.co/cX0XdbAMiS

— Status (@ethstatus) August 20, 2024

Aleph Zero’s Layer-2 Enhances Privacy

On Aug. 12, Aleph Zero, a blockchain ecosystem prioritizing privacy and efficiency, introduced a new Ethereum-compatible Layer 2 solution on its mainnet. This development leverages the blockchain’s Substrate-based WASM Layer 1 as a Data Availability Layer and integrates with zero-knowledge operating system (zkOS) privacy tools.

The new Ethereum Virtual Machine (EVM) layer, built collaboratively with the rollup-as-a-service (RaaS) provider Gelato, uses Arbitrum Orbit technology and is designed to significantly reduce block times, aiming for a speed of 250 milliseconds.

The AZERO token, the native cryptocurrency of the Aleph Zero ecosystem, will continue to be used on the Layer 2 to power all gas transactions.

Ethereum Dominates NFT Sales Despite Volatility

In August, Ethereum once again led the ranking in NFT sales volume despite concerns about price crashes and volatility.

Compared to July, Ethereum’s NFT sales experienced a slight decrease of 10%, reaching $127.7 million. CryptoSlam data also showed that the Ethereum network attracted 79k buyers and 63k sellers, the same as in the previous month. The number of NFT transactions on Solana reached almost 770k in August (+28%).

In August, CryptoPunks led the Ethereum NFT collections, topping the charts with $18.1 million in sales, reflecting a remarkable 118% increase. Sorare followed closely in second place, generating $12.9 million, up by 26%. Bored Ape Yacht Club secured third place with $11.6 million, marking a 30% rise. Pudgy Penguins ranked fourth, achieving $8.5 million in sales, with a 30% increase.

However, not all collections saw gains. Milady Maker recorded $4.6 million, a decline of 8%, while Azuki experienced a significant drop, reporting $2.7 million, down by 25%.

Most Expensive CryptoPunk NFT Quietly Sold

On Aug. 19, the most expensive piece in NFT’s CryptoPunks collection was sold for an undisclosed amount.

In 2022, NFT investor Deepak Thapliyal made headlines when he purchased CryptoPunk #5822, a rare “alien punk” wearing a bandana, for 8,000 ETH, the equivalent of $18.8 million at the time of writing. This sale set a record for the highest bid ever made for a CryptoPunk and is still regarded as the fourth most expensive NFT transaction in history.

According to the official CryptoPunks website, only one alien Punk is currently for sale, listed at 5,000 ETH, approximately $11.7 million.

What’s Next for Ethereum?

Despite the long-awaited launch of spot Ether ETFs in the U.S., the price of Ether fell 21% in August. While there were positive developments within the Ethereum ecosystem, like increased developer activity and Layer 2 solutions thriving, the overall market sentiment and on-chain metrics painted a concerning picture.

Ethereum’s ability to overcome current headwinds and regain price momentum is contingent upon a complex interplay of factors. A looming recession or a persistent decline in network activity could further erode investor confidence, casting a shadow over the cryptocurrency’s future.

The recent outflows from Ether ETFs, while not entirely unexpected, could significantly impact the price in the long run. The success of these ETFs hinges on their ability to attract and retain investors, which in turn depends on Ethereum’s overall performance and market sentiment.

Moreover, the burgeoning development of Layer 2 solutions presents both opportunities and challenges for Ethereum’s base layer. While these solutions are currently driving transaction volume and enhancing scalability, their long-term impact on the Ethereum blockchain remains uncertain. The question is whether Layer 2s will ultimately siphon off so much activity that the base layer becomes less relevant, or if they will serve to complement and strengthen Ethereum’s core functionality.