Ethereum Price Tumbles, Grayscale Ethereum Trust Down 50%: Here’s Why

KEY POINTS

  • ETH price declined sharply along with GrayScale Ethereum Trust’s collapse
  • DeFi is not positively affecting ETH because the latter is not needed to obtain DeFi tokens
  • In the long run, DeFi’s success is also the success of Ethereum, which found its utility and market fit

A bear trap at $250 caught buyers by surprise, crashing Ethereum to $230 in one day. The collapse of a Grayscale Ethereum Trust and the excitement for Decentralized Finance (DeFi) tokens over ETH are taking the world’s second-largest cryptocurrency back to the $220 range.

Ethereum rallied hard in on Monday with a 6.77% increase, only for the token to crash in the next three days. At present, the $230 level might not be able to act as strong support and if it failed to defend, Ethereum is poised to go back to $220.

In a report from Bloomberg, Ethereum’s sharp decline can be attributed to Grayscale Ethereum Trust, an open-ended grantor trust whose shares are all solely invested in ETH. The trust’s price started declining June 5, but on June 22, when ETH was closing into 250, the trust continued declining further. The trust tumbled more then 50%.

According to Nic Carter, co-founder at CoinMetrics, the collapse is because hedge funds and other accredited investors are liquidating their holdings after the mandatory 12-month lockup of those holdings has ended. 

“Bad news for retail investors that didn’t do their diligence,” Carter told Bloomberg.

It was widely expected for Ethereum to increase in value because of its transition to Proof-of-Stake (PoS) and DeFi. While PoS may take some time before it will be activated, DeFi is already here.

DeFi is a novel approach to financial services that creates a peer-to-peer financial network, which effectively means taking control of finance away from traditional banks and monetary regulators. The Ethereum blockchain can support the creation and execution of smart contracts, self-fulfilling contracts that do need an intermediary for verification to proceed with transactions. Most DeFi protocols are built on top of the Ethereum blockchain. As a testament, the total locked value in DeFi has already exceeded $1.5 billion, much of it in Ethereum or Ethereum-based tokens. 

Yet, despite the excitement for DeFi, with DeFi-related tokens rapidly increasing in price, the same could not be said with ETH, whose Ethereum blockchain is where most of the DeFi tokens live.

According to Ryan Watkins, crypto researcher at Messari, there is no reason for ETH to rise along with DeFi tokens, similar to what happened during the Initial Coin Offering (ICO) boom of 2017.

“While it’s true that both the ICO boom and DeFi create demand for the Ethereum blockchain, only one needs ETH to be money to work (and it isn’t DeFi),” Watkins wrote in the Messari newsletter.

At the same time, he argued that there is no need for investors to buy ETH to convert it to a DeFi token. In 2017, investors needed to buy ETH to buy tokens offered in ICOs. ICO projects at that time also needed to convert whatever tokens they accumulated to ETH so that they can issue the ICO tokens to the investors. The ETH they received could then be liquidated to finance the project.

Today, investors do not need to convert ETH to a DeFi token. Stablecoins can be used. “For an increasing amount of DeFi tokens, you can even just use a bank account,” Watkins added further. 

Watkins conceded, however, it does not mean ETH won’t be affected in the long run with all the positive sentiments surrounding DeFi. First and foremost, DeFi protocols always require capital to work:

Crypto dollars, or stablecoins whose value is pegged to the United States dollar, will continue to undermine the need for Ether and even Bitcoin to be used as collateral for DeFi.

But the success of DeFi on top of Etherum is also the success of Ethereum, which has found a place in the market.

“Ethereum has developed from a piggy bank for ICO projects to a burgeoning digital economy,” Watkins said on Twitter. He argued Etherem has found its utility and utility is a key component of what makes money valuable.“It is possible that within a couple of years, ETH may not only be the most useful asset in crypto given its on-chain economy but also crypto’s most credibly scarce asset given ETH 2.0 and EIP 1559.”

Ethereum is the second-largest cryptocurrency by market cap. Photo: Getty

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