Ethereum has been described as the Bitcoin killer. Over the past few years, the platform has enjoyed the development of a number of popular decentralized apps (dApps) including UniSwap, SushiSwap, AAVE, and Compound – just to name a few. These dApps are currently the backbone of the Decentralized Finance (DeFi) ecosystem. Ethereum offers a range of decentralized products such as AMM swaps, decentralized exchanges, decentralized stable coins, and decentralized options exchanges. In essence, the foundation of the decentralized financial ecosystem on the ETH blockchain is already complete after only a few years of work by developers. In contrast, traditional finance has existed for hundreds of years. Chinese pawnbrokers existed 1500 years ago, and the Amsterdam stock exchange was founded in the early 1600’s.
It seems pretty unbelievable that we are witnessing the birth of an entirely new financial system over the last decade, doesn’t it? Many would say yes, but is it really all it’s made out to be? Ethereum has suffered from exceptionally high transaction fees when the network is congested. Why is it congested? Essentially, trading activity has surged over the past few months, and there have been insufficient nodes to handle the necessary amount of transactions. Below is a screenshot from when I wanted to deposit some DAI to AAVE on the 11th of May (with ETH priced at 3600~ $4000). It cost $612, the network was extremely slow, and it remained a pending transaction for a number of days. Who would someone pay $612 just to transfer or deposit some money? Isn’t cryptocurrency dubbed as having low transaction costs and being swift/efficient?
At the time of writing, the transaction costs to deposit this amount to AAVE are still around ~$32. This isn’t particularly competitive compared to electronic transfers with traditional banks.
I am not a crypto fundamental analyst, and these are just my own experiences using Ethereum in some common scenarios. You may have had different, or better, experiences than myself. Regardless, these fees and network times are a huge obstacle that needs to be overcome. Nevertheless, let’s talk Ethereum price action.
Ethereum has a similar upward trendline when compared to Bitcoin. They have both have been rising since the start of Covid in March 2020, and both have an approximately 1.5-year uptrend. Although Ethereum does not have a distinct top pattern like Bitcoin’s complex head-and-shoulders, it rallied 85% to approximately $2000 over the course of 2 weeks. This was the first warning sign. This is a sign of extreme greed, and can often be seen as the last stage of a trend. It subsequently broke below the uptrend (the red line) – and this can be treated as the second warning sign. It has been almost 2 months since this significant price collapse. The price range has been trading narrower and narrower, and volume has been declining. The price of Ethereum is now sitting on 2 supports. Namely, the first one is the $2000 price level support and the second is the 1.5-year upwards trendline, which is highlighted by the green line. They coincide in a similar price range of $2000. This is often the case when trendline and support intersect together, essentially pointing out a fundamental support. Consequently, if the $2000 price level is broken, we can expect Bears to take charge of the price and bulls to remain passive.
Why is it more likely that Bears are taking charge?
If $2000 still holds, we can expect ETH to trade between $2000-$4000 unless ETH can climb back above the previous top price of ~$4300. In that case, according to the famous Dow Theory, to call this a true uptrend each rally must reach a higher level than the one before it. There is probable resistance at $3000,$3600, and $4300, and the ETH price has dropped approximately ~53% from its peak. In order to reach a higher level, ETH must rally over 100%. How likely do you think it is for ETH to rally over 100% in a few weeks or months? When we talk about Bears and Bulls in technical analysis, it essentially refers to the purchasing power and psychology of human beings, the desire or willingness to sell, or to hold/buy an asset that is traded on the free market. The Bulls have most likely been exhausted considering the most recent explosive uptrend. To analogize, If an army has pushed forward too rapidly, suffered casualties, and run out of supplies – they eventually need to retreat to a safer base to resettle and consolidate, just like our Bulls.
So where is the base and support ?
The next potential support for ETH is likely in the $1700-$1800 range, and if this base cannot hold, the next base is likely at $1300-$1400. If not, we could see a potential retreat to $1000 in the coming months.
Author: Peter Yuen