Ethereum’s brutal week — 3 reasons why

Since hitting highs of over $1,400 in mid-January, Ethereum has been locked in a bitter downtrend, punctuated only with relief rallies to meet a series of lower highs. At present, the cryptocurrency is trading under $300—a price not seen since November 2017.

To put this into perspective, the loss represents the removal of just over a hundred billion from Ethereum’s market cap, a value bigger than the GDP of Slovakia, and not far from the entire net worth of Jeff Bezos. In terms of its share of crypto’s total market cap, Ethereum now sits around 14%—a long way from its high of 32% in June last year, when it was fast closing in on Bitcoin, which at the time held 38% (since then Bitcoin has recovered to 54%).

But is it fundamentals or technicals driving this downturn? Does the drop in price reflect a fundamental flaw, or is Ethereum just caught on the wrong side of yet another tumultuous market cycle?

Technical doubts
Falling prices are not necessarily indicative of flawed projects, but technical uncertainty doesn’t fill investors with confidence, and as the market sentiment swings from bullish to bearish, small question marks become bigger existential doubts.

Ethereum’s path to decentralisation remains impeded by unanswered questions, and critics of the cryptocurrency are not lacking in ammunition—pointing to unresolved issues around scaling, concerns over insecure smart contracts, and burgeoning competition as more and more organisations choose to build their own blockchains.

Perhaps the most glaring evidence of weakness has come from Dapps, which with just a bit of fun and games, have proven themselves capable of impairing the normal functioning of the network, as seen with CryptoKitties, and most recently the smart Ponzi schemes.

Along with issues of scaling, which have solutions on the way in the form of Casper and Sharding, some critics suggest increased centralization on the network is damaging its credibility, touting larger block sizes and the Proof-of-Stake consensus algorithm as leading to the centralization of power by those who have enough money: the entrance barrier to staking on the network is 32 ETH.

Jimmy Zhong, co-founder and CEO of Ethereum competitor IOST, suggests that these technical issues could be contributing to Ethereum’s decline:

“Some of this price decline may be because the platform that Ethereum has been promising since its launch is still so far away. Bogged down by its scaling issues and clearly struggling to keep up with platforms that aren’t hampered by legacy technology, there are cracks showing in Ethereum’s armor. This is one of the reasons that decoupling from Ethereum is such a big deal and why companies are starting to show interest in developing their own blockchains.”

Dumping ICO funds
As the bear market persists, ICOs that raked in the funds last year are now beginning to open up their treasuries, and are increasingly selling large portions of the Ether that they raised through token sales.

Data collected by crypto analytics firm Santiment suggests that startups have spent upwards of 110,000 ETH over the past 30 days. Which, according to Biswa Das, founding partner at crypto hedge fund Bloomwater Capital, is a last ditch effort to cover operational expenses in fear that the market will move lower:

“These startups are raising a lot of funds but they don’t have treasury management or enough cash management experience, so they’re selling too early and causing a lot of pressure in the market. It was fine last year but right now the market is so fragile that it causes a lot of pressure.”

The best token projects, though, are keeping their nose to the grindstone, says CoinList co-founder Andy Bromberg. “Ethereum's price volatility is a result of market pressures, not anything more fundamental around the technology — which is what the highest-quality projects care about. The best token issuers are heads down focusing on building their products and businesses, and not looking up at the prices.”

Market cycles
It is not only ICO projects feeling the pinch, but also uncertain retail investors, who are scrambling to get out of the altcoins that have bore the brunt of the market downturn—with coins like XRP down over 40 percent in the last 30 days, compared to bitcoin which is only down around seven percent.

This dramatic price movement, according to some pundits, serves a key Darwinian purpose—eliminating the weak. Josh Fraser, co-founder of peer-to-peer marketplace platform, Origin, likens the current downturn to a purge—which only the projects with real potential will manage to survive:

“We've been through this cycle before and we'll go through it again. The hype and exuberance of last year has passed, but meanwhile the real work continues. Ethereum developer tools like Truffle are seeing a record number of downloads ... and a remarkable amount of innovation is still happening every day in the Ethereum community. During the dotcom bubble, companies like Amazon and Google were able to thrive, while many others around them crashed and burned. I think we'll likely see a similar reckoning with blockchain projects. We'll find out which teams and ideas are here for the long term.