Three fundamental metrics appear to be driving Ethereum lower today.
Ethereum (ETH -5.04%) is among the most closely watched cryptocurrencies in the market, and for good reason. The world’s second-most valuable token, Ethereum’s price action means a great deal for the overall market. Today, Ethereum is seeing strong selling pressure, now down 5.6% over the past 24 hours, as of 2:45 p.m. ET.
This move appears to be both a key driver of the crypto market’s 3.1% decline over the same time frame, and a reflection of increasingly bearish sentiment among investors over the past day. The stock market has also declined considerably, with the S&P 500 now down more than 1% at the time of writing. These moves reflect broader concerns that risks may be piling up heading into what could be a volatile election season.
Now, despite these broader risks, there are some very specific risks to Ethereum that I think investors may want to pay attention to right now. Here are three key factors that appear to be impacting this token today.
What’s moving Ethereum today?
From a fundamental perspective, cryptocurrencies like Ethereum have a few key drivers that investors tend to watch closely.
One is total value locked, or TVL, which measures the amount of activity that happens on a particular network. For Ethereum, this amount is considerable, with around $46.8 billion of TVL noted on its network as of Oct. 23. However, this number is down considerably from this year’s peak in early June (around $66 billion), while other competing Layer-1 blockchain networks in the DeFi space such as Solana have seen an increase of nearly 25% over the same time frame.
Another factor that appears to be playing into Ethereum’s descent lower today is a sharp increase seen in the amount of Ethereum that’s being listed on exchanges. In general, when tokens are taken from so-called “cold storage” (stored on a device such as a ledger) to an exchange, it can indicate a desire for long-term holders to sell their tokens. As is the case with any asset, greater supply on the open market can lead to lower prices, so a recent peak on Oct. 21 in terms of the amount of Ethereum on exchanges could signal some selling pressure on the horizon for this token.
Finally, there’s an intriguing analysis I read recently on Ethereum’s leverage ratio, which measures the difference between open interest and the derivatives exchange reserve. What this metric measures is the difference between the aggregate amount of derivatives currently available and the amount of Ethereum sitting on all derivatives platforms. Essentially, when Ethereum’s leverage ratio rises (as it has in recent days), it means that derivatives activity is picking up faster than the rate of capital (Ethereum) inflows onto exchanges. This could mean greater leverage is being used to play Ethereum positions on the long and short side, amplifying volatility in the token (and therefore risk).
What to make of these indicators
In my view, there are certainly some very concerning fundamental metrics investors can point to as reasons to be a little more cautious with Ethereum over the near term. Now, I view this crypto network as a likely winner over the long term, but I’m taking a multiyear viewpoint on Ethereum. Many traders and speculators are working with much shorter time frames, meaning we could see some increasingly volatile moves with Ethereum moving forward.
For investors who also hold a long-term view of Ethereum, any significant swings to the downside could be viewed as buying opportunities, if one believes that TVL and other metrics will improve over time. For now, I think these are simply key metrics investors should watch.
Chris MacDonald has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool has a disclosure policy.
