The Ethereum network is facing a withdrawal of smart contract applications, which has curbed the recent rise in ETH prices.
Ethereum ( ETH ) price is facing resistance after hitting the $1,970 level on July 3. A number of factors have limited gains, including a greater likelihood of interest rate hikes in the coming months and a tightening regulatory environment for cryptocurrencies.
Macro Headwinds for the Fed
In addition to external factors, the Ethereum network also faced problems with the withdrawal of smart contract applications, which also suppressed the gains in June.
Investors are now questioning whether the impetus from Bitcoin ( BTC ) ETF requests has faded, opening room for a correction down to $1,700 levels last seen on June 16.
Recent macroeconomic events may provide some clues, including the 2% annualized growth in U.S. GDP in the first quarter, the 6.8% year-on-year increase in Germany's consumer price index in June, and China's Caixin Global Services Purchasing Managers' Index (PMI) reporting activity expansion.
As a result, strong economic indicators have raised investors' expectations for further Fed tightening.
Federal Reserve Chairman Jerome Powell's suggestion of two more rate hikes in 2023, along with rising capital costs and higher returns on fixed-income investments, have dampened interest in cryptocurrencies.
On the regulatory front, the most pressing news and events include:
June 28: European Union (EU) lawmakers advance a controversial data bill that calls for changes to smart contracts, including kill switches that allow smart contracts to be safely terminated and rules for what data can be shared.
July 4: Local authorities searched Binance Australia’s corporate offices as part of an ongoing investigation into its derivatives business, whose license was shut down in April 2023.
TVL nears three-year low as web demand falls
The Ethereum network may be facing challenges of its own, especially after co-founder Vitalik Buterin said on June 29 that he would not stake all of his ether due to the complexity of multi-signature wallets.
Total value locked (TVL), a measure of deposits locked in Ethereum smart contracts, hit its lowest level since August 2020. The metric fell 3.1% to 13.7 million ETH in the 30 days to July 4, according to DefiLlama.
A lower TVL means that investors are either losing interest in the network’s smart contract usage or turning to Layer 2 alternatives in search of lower transaction fees. Either way, the underlying demand for the Ethereum network is negatively impacted, and therefore interpreted as bearish.
Leveraged longs drive ETH price higher
Analyzing professional traders’ positions in ETH derivatives is crucial to determine the likelihood of ETH price breaking through the $1,970 resistance level.
There are occasional methodological differences between exchanges, so readers should focus on changes rather than absolute numbers.
ETH traders have the highest futures long-short ratio.
Although Ethereum has been trading in a tight range between $1,815 and $1,975 since June 22, professional traders have increased their leveraged long positions in futures, as seen in the long-short ratio.
On the cryptocurrency exchange Binance, the long-short ratio has risen sharply, from 1.14 on June 20 to 1.30 on July 4. Similarly, on OKX, the long-short ratio also rose from 0.76 on June 20 to a peak of 2.25 on July 4, in favor of leveraged longs.
To rule out external factors that may only affect Ethereum futures, we should analyze the Ethereum options market. The 25% Delta Skewness indicator compares similar calls (buys) and puts (sells) and turns positive when fear is prevalent because protective puts have higher premiums than calls.
Ethereum 30-day 25% deviation.
If traders are concerned about a price crash for ETH, the deviation indicator would be above 8%. On the other hand, general excitement would reflect a negative deviation of 8%.
As shown above, the Delta skewness was slightly positive between July 3 and July 4, but it could not sustain such levels. Currently, the minus 2% indicator shows a balance of demand for calls and puts.
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$1,700 Might Be Far Away for ETH, But $2,000 Is Also Far Away
Considering these four reasons, namely the increase in leveraged long-short ratio, the decline in TVL, the potential rise in interest rates, and the tightening of cryptocurrency regulation, ETH shorts are better able to resist the positive price impact of the Bitcoin ETF event.
While these factors may not be enough to push ETH prices to $1,700, they present significant obstacles for ETH bulls. Notably, the attempt to break above $2,000 on April 13 lasted less than a week. Therefore, it is more likely that bears will successfully defend the $1,970 resistance in the short term.