This article takes a look at the current state of Ethereum and seeks to identify the root cause off its staggering drop since the start of 2018.
Ethereum (ETH) has been one of the most underperforming cryptocurrencies in the market since the entire cryptocurrency market crashed at the start of 2018. From all-time highs to a significant reduction in our portfolio by over -80%, it is high time we take a deep dive into the current issues surrounding the 2nd largest blockchain in the world.
ETH Vs Cryptocurrency Market: Poor Performance
Since the bear market at the start of 2018, the price of ETH has underperformed as compared to the rest of the cryptocurrency market. Ethereum’s price has fallen by more than 80% since the start of the year, from an all-time high of over $1,400 back in January 2018 to less than $200 in September 2018.
Even though the entire cryptocurrency market has fallen significantly in tandem since the start of 2018, ETH has been hit particularly worst. Here is a graph that shows the returns of the market for the past 6 months compared to ETH’s returns (denominated in %):
It is clear that ETH has severely underperformed relative to the rest of the market. In order to compare the returns of ETH with the rest of the market, an index of the top 300 top cryptocurrencies based on market capitalization (known as the Fundstrat Crypto 300 Index: FSTOK300) is used as the benchmark for the average cryptocurrency market returns. It can be seen that ETH has been losing more than double in value compared to the entire cryptocurrency market. In the past 6 months, ETH’s value has shrunk by close to 70%, while the top 300 coins had an average reduction of just 31%.
This goes to show that ETH’s price struggled with greater price decline than the entire market.
Biggest Hindrance: ICO Sell-offs
Perhaps the biggest hindrance to Ethereum’s price is the heavy selling pressure by Initial Coin Offering (ICO) projects that raised huge amounts of funds – denominated in ETH – back when the ICO craze started in 2017. Over $ 6.2 billion USD was raised by a total of 875 ICOs back during the bull run in 2017. Here is a graph that shows the exponential increase in ICO fund-raising in 2017:
The second half of 2017 saw ICO funding grew tremendously, and coupled with the crazy bull run, many were investing in ICOs in the hopes of amassing huge returns. This meant that ICOs raised a tremendous amount of funding in ETH coins. The reason why most ICOs raised money in the form of ETH is because the majority of new ICO projects are built on the Ethereum blockchain, and therefore accepts ETH as the initial investments for their ICO in return for the project’s native tokens. It is important to understand the difference between cryptocurrency coins and tokens: cryptocurrencies have their own native blockchain while tokens are built on top of open-source existing blockchains. Ethereum is the most popular (and one of the oldest) platform for new ICO projects looking to build their applications on and issue their own native tokens.
Looking at the list of over 1100+ tokens in the cryptocurrency market at the moment, we can assess the popularity of Ethereum. Out of 1,107 tokens in existence, more than 87% – 966 tokens to be exact – are issued on the Ethereum blockchain. And if you look at any new ICOs in the market, you can see that the majority of them are ERC-20 tokens, meaning that it is issued on the Ethereum blockchain and complies with Ethereum’s protocol standards. This highlights the success of Ethereum as being an open-source preferred blockchain for projects to build applications on. However, it comes with a cost.
Ethereum’s popularity has a disadvantage; ETH coins face a huge sell pressure due to ICOs raising money in ETH and thereafter selling it down the road to meet their expenses.
According to the data collected from Santiment, a number of ICOs offloaded their ETH stash in July and August. Here’s a visualization of the data:
ICO projects that raised funding in ETH must liquidate their ETH stash to fiat money at some point in the future to meet operational expenses, just like how a business operates. Especially when the market turned bearish since the start of 2018, ICO projects have been dumping their ETH to not only meet expenses but also to manage their risks amidst the bear market. There have been many reports of projects selling away a huge portion of their ETH, and this has caused immense selling pressure for ETH. This selling pressure has been a constant factor that has caused ETH’s value to underperform the entire market.
Reduction in ICO Selling Pressure
A recent report by Bitmex Research that tracks 222 ICOs suggested that almost 75% of all ETH raised in ICOs have been sold or transferred out of their wallets:
It was no surprise that the largest ICO in history was issued by EOS (EOS), which raised a whopping 7,211,776 ETH (equivalent of $4 billion) and represented close to half of the total ETH raised amongst the pool of 221 ICOs. The entire ETH raised from 222 projects (including EOS) initially stood at over 15 million. Throughout the year however, ICOs started to liquidate their ETH stash, leaving only a quarter of the total ETH raised that has yet to be sold or transferred out. There is therefore an ETH balance of 3.8 million ETH tokens, which roughly translates to approximately $830 million.
This is positive news since only a smaller balance of ETH held by ICO tokens across the board would generally mean lower selling pressure. It is also worth mentioning that EOS positions itself as a direct competitor of Ethereum and has liquidated all of their ETH coins, which is excellent news.
In A Nutshell
ICOs have started offloading or selling away their ETH stash in order to manage risks and pay for operational expenses throughout 2018. Only a quarter of total ETH – raised in 2017 and early 2018 – is left to be spent. This would naturally reduce the selling pressure of ETH prices since the majority of ETH coins collected through ICOs have been spent. We can expect to see a sharp rebound of ETH prices thereafter. With a slew of fundamental news coming up that include the testnet implementation of Constantinople, scalability progress and potential futures listing, things are looking great for Ethereum.
Beneficial Resources To Get You Started
If you’re starting your journey into the complex world of cryptocurrencies, here’s a list of useful resources and guides that will get you on your way:
Trading & Exchange
- Crypto Guide 101: Choosing The Best Cryptocurrency Exchange
- Guide to Bittrex Exchange: How to Trade on Bittrex
- Guide to Binance Exchange: How to Open Binance Account and What You Should Know
- Guide to Etherdelta Exchange: How to Trade on Etherdelta
- Guide To Cryptocurrency Trading Basics: Introduction to Crypto Technical Analysis
- Cryptocurrency Trading: Understanding Cryptocurrency Trading Pairs & How it Works
- Crypto Trading Guide: 4 Common Pitfalls Every Crypto Trader Will Experience
- Guide to Cryptocurrency Wallets: Why Do You Need Wallets?
- Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet
- Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW)
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