Ethereum remains below $3,900, why?

This situation involves uncertainties surrounding the launch of the Ethereum ETF, significant open interest in ETF futures, and a lack of growth in Ethereum network activity.

Ether (ETH) prices have dipped to $3,741, having previously surpassed $3,900 several times in the last week but failing to maintain that level. The market had high hopes for a surge following the anticipated approval of a spot Ethereum exchange-traded fund (ETF) by the United States Securities and Exchange Commission (SEC). Notably, Ether’s gains occurred on May 21, a couple of days before the SEC’s decision.

Ethereum spot ETF approval: not everything came out as expected

One could argue that traders in spot ETFs are still awaiting approval for the respective Form S-1 for each fund. Senior Bloomberg ETF analyst Eric Balchunas anticipates Ethereum spot instruments to commence trading by July 4, while his colleague James Seyffart highlighted BlackRock’s updated S-1 on May 29, indicating progress towards spot Ethereum ETF launches.

However, analysts suggest that Ethereum (ETH) might encounter pressure if the Grayscale Ethereum Trust (ETHE) witnesses outflows in the weeks post its conversion to an ETF. A similar issue has impacted Grayscale’s Bitcoin fund (GBTC) due to its high fees. Speculation is rife that outflows from Grayscale ETHE could surpass $100 million per day initially, potentially offsetting or exceeding inflows from new investors.

Essentially, Ether’s inability to surpass the $3,900 resistance partly stems from the rally preceding the approval of spot ETFs. Disappointment among some investors regarding the delayed effective trading has introduced uncertainty and exerted a negative influence on prices. This situation could pose challenges as Ether’s futures open interest hit an all-time high on May 28.

$16.8 billion in Ether futures poses liquidation risks

Open interest reflects the total count of ETH futures contracts offered across various derivatives exchanges such as Binance, CME, OKX, and Bybit.

Even though ETH futures match longs (buyers) and shorts (sellers) at all times, a higher notional value in play significantly increases the risk of liquidations. For instance, if longs are leveraging 10x, their contracts may face forced liquidation if the price of Ether drops by just 10%.

Conversely, a similar scenario can occur if the price of Ether suddenly surges by 10% and shorts are heavily leveraged. In such instances, exchanges will automatically purchase ETH futures to mitigate their risk and close positions lacking sufficient margin deposits.

This $16.8 billion open interest in Ether’s futures poses a risk for potential buyers, potentially keeping the ETH price below $3,900.

Competing networks outpaced Ethereum’s activity growth

The high gas fees on Ethereum could be interpreted as a positive indicator of its ongoing popularity, reflecting sustained demand for block space. Nevertheless, these fees also present an opening for rival blockchains prioritizing scalability. While some activity has shifted to Ethereum’s layer-2 solutions, certain users and projects are exploring alternatives like BNB Chain, Solana, or Aptos.

Assuming that every decentralized application (DApp) necessitates the same degree of decentralization as Ethereum provides would be overly simplistic. Many users of basic finance, gambling, or gaming applications are reluctant to utilize bridge solutions to access a lower-fee environment. Consequently, Ethereum’s mainnet volume growth lagging behind its competitors is typically perceived as a lost chance.

The Ethereum network saw a 2% decrease in daily active addresses interacting with decentralized applications (DApps) on May 30, along with a slight 2% uptick in total transaction volume compared to the previous day. Despite Ethereum’s robust fundamentals, diverse investor base, and numerous DApp functionalities, there’s a noticeable trend towards exploring alternative blockchains.

For instance, BNB Chain boasts over four times the daily active addresses of Ethereum, with its users transacting over $3.5 billion on PancakeSwap in the past week alone. Additionally, a single DApp, Move Stake, attracted over 226,350 active addresses during the same period. These on-chain metrics suggest a lack of confidence in Ethereum’s performance, which could hinder Ether’s ability to surpass the $3,900 mark in the short term.

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