Ether Struggles Amid Regulatory Concerns, DeFi Exploits, and the Cryptocurrency Market Downturn
Summary:
Ether (ETH) finds maintaining the $2,000 level challenging amidst broader cryptocurrency market downturns and signals of serious repercussions for Binance Founder CZ, by the U.S. Department of Justice. The recent KyberSwap exploit, which drained $46 million from DeFi applications on Ethereum, has further dampened investor confidence. A lack of details in Tether's recent announcement about its collaboration with the U.S. Secret Service, hinting at the Federal Bureau of Investigation's possible involvement, has fueled speculation about a stricter regulatory environment for cryptocurrencies. The current underperformance and reduced demand for Ether are potentially driven by these factors.
The second most popular cryptocurrency, Ether (ETH), is finding it challenging to keep above the $2,000 level as of November 27. It's been unable to crack the $2,100 resistance despite making three attempts in the last fortnight. As the wider crypto landscape faces headwinds, the reasons behind Ether's struggles are worth investigating. The United States Department of Justice (DOJ) recently indicating potential serious consequences for Binance founder Changpeng "CZ" Zhao adds to the grim sentiments. A request was made by U.S. prosecutors to a Seattle federal court on November 22, seeking a review and reversal of a decision to allow CZ to return to the UAE based on a $175-million bond. The DOJ argues that permitting Zhao to leave U.S. soil prior to sentencing presents an unacceptable risk.
Decentralized finance (DeFi) applications on Ethereum, including Ethereum DApps, encounter fresh obstacles. The recent exploit of $46 million from KyberSwap on November 23 has since lowered demand for DeFi. Despite previous audits by security experts, such incidents cause apprehension about the overall DeFi sector's safety. The attacker did show signs of returning some funds, adding a silver lining to the cloud. However, it has indeed highlighted the inherent risks.
Investor confidence has also taken a knock due to Tether's November 21 blog post. Tether, the company behind the $88.7 billion stablecoin USD Tether (USDT), declared the recent collaboration of the U.S. Secret Service with its platform and potential involvement of the Federal Bureau of Investigation. The scantily provided details fuel thoughts of an impending rigid regulatory environment for cryptos, given the closer alliance of Tether with authorities and the increased scrutiny of Binance. A combination of these factors may well be causing Ether's poor performance, with multiple on-chain and market signs pointing to a decline in ETH demand.
CoinShares details that Ether exchange-traded products (ETPs) registered a $34 million inflow in the past week. This is a mere 10% of the inflow enjoyed by Bitcoin crypto funds in the same period – striking when considering both assets are competing for a spot exchange-traded fund (ETF) approval in the U.S.
Currently, Ethereum staking's seven-day average annualized yield is 4.2%, seen as less attractive compared to the 5.25% return from conventional fixed-income assets. This discrepancy caused a significant $349 million outflow from Ethereum staking last week, according to StakingRewards.
Further issues arise with the high transaction costs, with the seven-day average transaction fee a hefty $7.40. This has negatively affected the demand for decentralized applications (DApps), resulting in a 21.8% drop in DApps volume on the network in the past week, as recorded by DappRadar.
Significantly, while Ethereum DeFi applications have seen a considerable fall in traffic, opposite chains like BNB Chain and Solana experienced an 11% increase and stable activity respectively. Ethereum network protocol fees have also been on a descending trend for the last four days, reaching $5.4 million on November 26. This statistic compared with the daily average of $10 million between November 20 and November 23, according to DefiLlama, could potentially result in users migrating to competing chains for better returns.
Increased regulatory hurdles and the possible impact of exploits and sanctions on stablecoins employed in DeFi applications seem to be contributing to Ether's price pullback on November 27. The expanding involvement of the DOJ and FBI with Tether ramps up the systemic risk for liquidity pools and the entire oracle-based pricing mechanism. Though there's no immediate need for frantic selling or alarm about a drop to $1,800, the sluggish demand from institutional investors as hinted by ETP flows, doesn't bode well for the market. This article should be seen as general information only, not legal or investment advice. The opinions expressed in this article are solely those of the writer and do not necessarily align with those of Cointelegraph.
Published At
11/27/2023 11:00:00 PM
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