Why Is Ethereum Dropping? Will Ethereum Rise Again?
12th July 2017 – Ethereum price has dipped below $200 with most cryptocurrencies too. Everyone is concerned whether the bearish trend is going to stay for awhile or Ethereum will rise again after a short-term volatility. Why is Ethereum dropping? Should you sell your Ethereum now?
Disclaimer: The content below should not be taken and viewed as investment advice, but only information and opinions. This article is for information and illustrative purposes only.
Why Is Ethereum Dropping?
No one exactly knows what is going on with its recent dip recently. Based on my observation, the followings could be the culprits to the fall.
#1 Initial Coin Offerings
Token sales, often called Initial Coin Offerings (ICO), are exploding in popularity. Seemingly each week a new record is hit with huge sums being raised by innovative projects in almost no time.
For those who are not familiar with ICO, it is an unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks.
Just like Ethereum, it raised $18 million with an ICO in 2014. Just like many other ICOs that are running presently, Ethereum’s team wanted capital in Bitcoin and hence, offered 2,000 ETH per BTC. BTC was priced at $650 and that constituted to $0.40 per Ether. If you are one of the early investors, buying one Bitcoin worth of Ether would make you a millionaire in due time.
Ethereum’s market capitalization has increased from 5% to 31% in just 4 months, at the same time Bitcoin’s market cap fell from 89% to 37%.
Ethereum is way more than just a cryptocurrency as it is also a platform which offers decentralized services based on the blockchain. Its underlying currency is Ether. It’s also a project which helps start-up launch their decentralized services, raise funds through ICO.
ICO, no doubt, is a proven and efficient way of kickstarting crypto projects, provided the product is in demand and a reliable team is working behind the scene. At the time of writing, there are more than 20 offerings being carried out a month. You can check the ICOs and Crowdsales on Smith + Crown website. According to Smith + Crown, there have already been more than $150 million raised this year through ICO.
Yes, you guess it right. We are reaching a stage where digital currency investing is becoming a norm. ICOs have been criticized for selling out quickly to large holders of cryptocurrencies. Tokens issued today are built atop Ethereum. An Ethereum-based token is to Ether as a concert ticket is to a US dollar.
ICO could be the primary reason for the massive downswings in Ethereum price. If you pay enough attention, there is a slight correlation between the ups and downs of the ETH price and the crowdfunding closing dates.
Although this may not be entirely right, there is still a big risk where the Ether raised by these ICO will be retained or dump on exchanges for fiat.
One prime example is Bancor Foundation that raised more than $150 million worth of Ether by offering their own token. Once the tokens were sold out, ETH was priced at $410, and drop to $310 a few hours later. Coincidently, Coinbase has crashed along with GDAX exchange and users are unable to sell or buy.
Could this really a coincidence?
Reminder: Tezos are currently undergoing their ICO. Just imagine what will happen if they dump all ETH in one go.
NOTE: Not all ICOs are scams. However, there are many ICO projects that don’t have a real product to offer.
On top of that, The recent ICOs has proven some drawbacks on the Ethereum platform. For example, Status ICO has caused a major slowdown, with a backlog of transactions greater than what the network was able to process. Another ICO, Bancor’s, fueled the investor with doubt when realizing how much ETH was put in the hands of startups. Most of the companies running ICOs have very little to show as proof of their product, and will most likely sell a majority of the ETH they raised to fund their project.
#2 Price Correction
Not only Ethereum, a majority of the crypto coins are mostly in a corrective phase after the furious rally that was led by Ethereum. On January 1,
On January 1, Ethereum was trading at just under $8 and has risen above $400 to an all-time high in June. The rise is about 5,100% since the beginning of the year. If you are an experienced trader, you should expect a sharp drop after that to go through the price correction phase.
Just like stocks, market corrections in the stock market are fairly frequent events. Despite the inherently uncomfortable nature of watching the price of Ethereum drop by more than 50% from the peak, price corrections can be healthy for both the cryptocurrency market and for investors.
It’s only natural as early holders will sell for some profit as well as fear from newer prospects selling because they want to cut their losses. Just look at bitcoin’s chart for the last 5 years. You will see this pattern multiple times, upswings followed by corrections.
There is a chance that the price could drop further. Bitcoin dropped 70% over two (2) years (between 2013 to 2015) from $1,000 below $300. So Ethereum’s price could drop even further than what it is today.
However, there is the potential long-term upside. Even if you bought at BTC’s ATH (around $1000) back in 2013, you’ve still nearly doubled your money today. Ethereum could very well do the same thing.
When crypto coin prices go up, it may seem like there’s no end to how high they can go. When this happens, coins become ‘overbought.’ That means some investors will try to buy into the rise of coin prices with the hope of making profits before a downward trend begins.
At this time, any kind of ‘bad’ news can trigger a sell-off. For examples, there were many occasions that triggered the panic sell-off.
There were several outages happened to Coinbase and GDAX that triggered a wave of panic selling that brought Ether price down.
Fake News on Vitalik Buterin’s Death
“Vitalik Buterin confirmed dead. Insiders unloading ETH” read the title of the post on 4Chan. When the fake news was published, people were selling like crazy. The hoax coincided with the overall market value of Ethereum falling by around $4 billion after the news was posted.
It turns out that Buterin wasn’t dead, nor involved in a car crash. He took to Twitter to prove that all was well.
Buterin’s posting appears to have helped quell the sell-off that followed the fake headline about his death. But the whole episode shows how digital currencies like Ethereum and Bitcoin, which are already volatile, can be subject to market manipulation.
Korean Exchange Hacked
Although the standards in cryptocurrency exchanges have considerably increased since the devastating bankruptcy of MT Gox which lost almost one billion dollars as valued at the time, there is still a possibility that the exchange is hacked like Bithumb. The hacking has caused monetary losses from compromised accounts have started to surface, and are quickly reaching into the billions of won.
This could possibly cause the traders to halt all trading or cash out their ETH to fiat currency
Will Ethereum Rise Again?
Ethereum is doing great things for blockchain technology and will continue to innovate. I believe the price of ETH (in the long run) will continue to rise. Comparing with Bitcoin, I find Ethereum’s value proposition more compelling because of its programmatic malleability. Simply, you could do so much more with ETH than Bitcoin.
Currently, there are currently more developers working on Ethereum and its infrastructure in contrast to Bitcoin. Ethereum provides a framework for Ethereum Dapps, so more Initial Coin Offerings (also a risk) and more demand for Ether.
Another reason why Ethereum will rise again as there are many successful adoptions of one or multiple solutions based on Ethereum like Augur, Gnosis, Golem, Akasha, Blocktix, Storj, and Swarm. Each of these has the promise to scale to an enterprise by themselves.
Furthermore, thirty big banks, tech giants, and other organizations including J.P. Morgan Chase, Microsoft, and Intel are forming an alliance to build business-ready versions of the software behind Ethereum. The list will continue to grow over time.
In the short term, it will continue to fluctuate because that’s the nature of exchange markets. Personally, I plan on buying every week, no matter if it’s high or low. Markets fluctuate for dumb reasons, but I believe in Ethereum, so it doesn’t matter to me.
As for the timing of your entry, it is ideal to pick a dip (now), providing that dip does not turn into a downward trend. Personally, for me, it is a long-term hold. I hold Bitcoin and Ethereum and will be buying more myself when it feels the entry point is right.
Ethereum will rise again, for sure.
Most importantly, do your own research and do not invest what you cannot afford to lose.