Ethereum Plunges Below Major $1,000 Now What?

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Ethereum (ETH) price fell as low as $896 over the weekend in what many have called one of crypto’s worst weeks ever. The top smart contract crypto fell to its lowest level in 18 months, pushed down by a combination of DeFi concerns and broader economic woes.

Ethereum closed at $994 on Saturday, down nearly 80% from its peak of $4,860 last November, according to CoinMarketCap. Other cryptocurrencies have suffered even bigger losses, with the total market cap falling to its lowest level since January last year. Since then, prices have recovered slightly. At the time of writing, Ethereum is trading around $1,150 and other top cryptos are also on the rise.

Ethereum’s price problems

Like many cryptocurrencies, Ethereum has struggled over the past six months. It’s down over 40% in the past month alone, and many analysts are predicting it could fall even further. So what is driving Ethereum’s dramatic price drop? Here are three of the biggest factors.

1. The entire market is down

The Federal Reserve is taking drastic steps to curb inflation, such as its recent 0.75% rate hike. Not only does this mean investors are more risk-averse at the moment, but it has also raised fears of a possible recession. This in turn puts pressure on riskier asset classes like crypto. According to data from CoinGoLive, over 98% of cryptos are down more than 90% from their all-time highs.

2. Decentralized finance could run into trouble

The collapse of Terra’s LUNA ecosystem rocked the market in May, and we’re still feeling the aftershocks. There is a lot of interconnectedness in the DeFi (decentralized finance) industry, which is fine when things are going well, but can cause a cascade of failures when things start to go wrong. Difficulties on one platform can easily pressure others, especially when prices are already so low.

Basically, Terra could have triggered a domino effect. Popular decentralized lending platform Celsius has suspended payouts and it’s not clear how many others are in trouble. Rumors have been circulating about crypto hedge fund Three Arrows Capital, and Babel Finance — another crypto lender — has also frozen withdrawals. DeFi users are set for more surprises. Given that a large portion of decentralized finance apps reside on the Ethereum network, the difficulties in DeFi are not great for ETH.

3. Uncertainty about the Ethereum merger

The Ethereum merger is one of the most anticipated events in the crypto space this year. It will move Ethereum from a proof-of-work mining model to a much more sustainable proof-of-stake system. However, the switch has been delayed several times, which has contributed to Ethereum’s price volatility. Currently, developers believe the merger will happen in August, but are reluctant to commit to a specific date.

If the Ethereum merger goes as planned, it could have a positive impact on the price and is an important step, especially for long-term investors. In the short term, be aware that the crypto industry is sometimes prone to a phenomenon called “buy the rumor, sell the news.” Essentially, people are speculating on high-profile events like major tech upgrades that will push the price to unsustainable levels. You then sell when the highly anticipated event does happen, causing the price to drop.

What now?

Many crypto investors are understandably excited about when this period of bearish price action might end. It’s one thing to know that crypto prices could fall dramatically when you first buy crypto, it’s quite another to see the value of your portfolio depleted and wondering if it could ever recover.

The challenge is that there are no guarantees. Crypto prices are certainly unlikely to recover significantly until economic conditions change and the Fed slows down on its drastic economic tightening measures. But cryptocurrencies also have some serious hurdles to overcome in the longer term. A big one is increased regulation, which is definitely on the way. Another discovers how deep DeFi contagion will go. We don’t know how many more platforms will fall.

These factors are contributing to increasing talk of another crypto winter, meaning prices could be depressed for some time and many crypto projects will fail. Bitcoin (BTC) and Ethereum are better positioned than most to weather an extended period of low prices. They are among the most established projects and collectively account for almost 60% of the total crypto market cap.

Still, there is a lot of uncertainty. Whether you’re considering buying the dip or cutting your losses and selling, the key is not to rush into decisions. Keep the long-term in mind and consider where you think Ethereum could be in 10 or 20 years. If you decide to buy Ethereum, only spend money you can afford to lose. That way, you can benefit from long-term growth, but further price cuts won’t throw your finances off track.

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We firmly believe in the Golden Rule, which is why editorial opinions are solely ours and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offerings on the market. The Ascent’s editorial content is separate from The Motley Fool’s editorial content and is produced by a different team of analysts. Emma Newbery has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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