Why is Ethereum Crashing? Understanding the Ethereum Plummet

Ethereum has been experiencing one of the biggest bear markets in recent years. The second-largest cryptocurrency in market cap touched a low of $1,109.56 – the lowest price in about 18 months. The digital currency is trading down 40.7% on the week of writing. However, why is the token falling? Here are the reasons why Ethereum is crashing.

Lido Staked Ethereum Depegging

The DeFi derivative version of Ethereum, Lido Staked Ethereum (stETH), has significantly fallen in the past few days. The coin, which is pegged to ETH in a ratio of 1:1, hit a bottom of $1035.34 on June 14, 2022, diverging significantly from the price of ETH, which was $1,109.56 at that time.

According to a report by CoinGape, stETH has been de-pegging since late Thursday, prompting Alameda Capital, one of the largest token holders, to dump tokens worth $1.5 billion. The former token holder sold all its stETH holdings.

If the token price continues to fall sharply, the DeFi platforms will liquidate positions that have borrowed ETH with the token. Therefore, holders will have to sell their stETH on the open market, resulting in token prices dropping even further.

While there is no direct correlation between ETH and stETH, the token can only be redeemable for ETH. Additionally, the token is used as collateral to borrow ETH on DeFi platforms such as AAVE and Lido.

While the drastic fall in the prices of stETH tokens may not have made a substantial direct impact on ETH, it is triggering panic selling of the ETH. ETH has fallen by 15.31% over the last 24 hours. Such market trends create uncertainties that trigger people to sell their tokens.

Fears about Federal Reserve’s Aggressive Moves

It is worth noticing that the entire cryptocurrency market is on a bear run. On June 12, Bitcoin (BTC) was trading at $28,000, translating to 6% in a week. As of June 14, BTC was trading at about $22,000. Other tokens such as BNB have also recorded a bear market trend in the previous days.

The general drop in the crypto market prices implies a more common factor influencing the trend. The release of the inflation data, indicating that the inflation in the United States has increased more than expected in May, is a likely micro factor. The report shows that inflation rose to 8.6% – the highest rate since 1981.

Experts predict that the Federal Reserve will be even more aggressive with rate hikes in response to the increasing inflation rate. Next week, Federal Reserve is expected to raise the interest rates to 1.25-1.5% after a similar move last month.

The Upcoming Merge Problem

Besides stETH and the microenvironment, the upcoming merge challenge also weighs on the Ethereum high sell-off. Ethereum will transition fully to Ethereum 2.0, a more energy-efficient proof-of-stake protocol.

The ‘difficulty bomb has delayed the complete transition,’ a code within the Ethereum, which increases the computing difficulty for mining. The code will help gradually eliminate miners from the network. The Ethereum community has generally welcomed the shift from proof-of-work to prof-of-stake. However, the developers have delayed the timing of the difficulty bomb to resolve some bugs that came up during the Merge on Ropsten – one of Ethereum’s oldest test networks. Initially, Ethereum’s co-founder Vitaly Buterin suggested that the complete transition to Ethereum 2.0 would happen in August. However, that date of launching date now seems unlikely. Such factors may have impacted the price of Ethereum in recent days.

Many factors could play out to influence the current decline in Ethereum prices. However, the depegging of stETH seems to be the leading factor that sets the ETH price slump from the downward price trend of other tokens in the market.

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Why is Ethereum Crashing? Understanding the Ethereum Plummet
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Why is Ethereum Crashing? Understanding the Ethereum Plummet
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Ethereum has been experiencing one of the biggest bear markets in recent years. The second-largest cryptocurrency in market cap touched a low of $1,109.56
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Luckmon
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