Recently, Ethereum (ETH) experienced a significant drop, with a 9.5% correction recorded in the early hours of Dec. 11. Despite this, the $2,220 support level held strong as buyers swiftly moved in to defend it. This has led to speculations and questions about the Ethereum network’s capability to restore bullish momentum to the Ether price. It’s also important to note that the correction mirrored the wider cryptocurrency market, with Ether’s 6.7% decline in the last 24 hours closely matching Bitcoin’s (BTC) 5.4% and XRP’s (XRP) 6.6% negative performances.
What Triggered the Ethereum Price Correction?
When considering the cause of the Ethereum price correction, it is natural to point fingers at excessive leverage, which is often blamed for price movements that partially revert within minutes. However, in reality, only $86 million in ETH long future contracts were forcefully terminated in the past 24 hours. This figure is insignificant compared to the $7.8 billion open interest in ETH futures, suggesting that a large part of the $600 billion decline in available positions was due to traders’ actions.
Binance’s Ether futures open interest declined by 6.8% in the past 24 hours, according to Coinglass. Similar impacts were evident on Bybit and OXK exchange, with negative 5.2% and 6.7% changes in ETH futures’ open interest, respectively. On the other hand, CME and Deribit saw flat open interest, suggesting that retail traders bore the brunt of the impact.
Implications of the Ethereum Price Correction
Some may argue that the correction was healthy as it flushed out retail traders using excessive leverage, whether due to their stop losses or the exchanges’ liquidation engines. However, this has led Ether investors to question whether the $2,400 level seen on Dec. 9 is now a far-off dream.
Adding to the concerns is the Ethereum network’s average transaction fee, which currently stands at $7.90, a level prohibitively costly for most users and use cases. This fee also burdens opening and closing layer-2 operations, even when batching transactions to reduce costs further.
Ethereum’s Competitors and Future Prospects
Despite the high fees, some analysts and investors argue that Ethereum’s success is reflected in the growth of its layer-2 solutions, which have grown to a massive $15.9 billion in total value locked (TVL). However, when measuring TVL, the Ethereum network has been losing market share to competitors. For instance, since Nov. 30, BSC Chain’s TVL declined by 2% in BNB terms, while the Solana network experienced a 5% TVL increase measured in SOL. In comparison, the Ethereum network faced a 7% decline in the same period, reaching its lowest level in over 3 years at 12.1 million ETH.
Interestingly, the Ethereum network remains the undisputed leader in decentralized exchanges (DEX) volumes, despite having significantly higher fees than its direct competitors. However, Ethereum’s weekly 26% gains in DEX volumes are far smaller than Solana’s, BSC Chain’s, or Avalanche’s at 142%, 47%, and 193%, respectively.
While the recent DEX volume gains occurred mostly outside Ethereum’s layer-2 ecosystem, it does not necessarily imply that Ether’s $2,400 high on Dec. 9 was driven by exaggerated derivatives leverage. Furthermore, given that the Ethereum network’s TVL decline seems to be compensated by growing demand from its scaling solutions, there is no reason to believe that the Dec. 12 price crash is a telling sign of further price correction.
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