Crypto: Why did it drop 22% in August?

Ethereum just suffered its worst month in over two years. In August, ETH fell by 22%, erasing any hopes of a quick recovery. This drop comes at a time when many observers expected 2024 to be a positive year for crypto, particularly with the anticipation of new regulations and ETF approval. However, the reality has been quite different. Various factors have sent the market into a downward spiral.

Massive ETF outflows and reduced network activity

In August 2024, Ethereum suffered a substantial 22% loss. This is the most severe since the collapse of Terra in June 2022 which sent the crypto down 45%. Experts mainly point the finger at the large outflows from Ethereum ETFs, a product that was supposed to attract more institutional investment. Luke NOLAN, research associate at CoinShares, said: “I think the elephant in the room is definitely the flows into Ethereum ETFs.” The ETFs, initially well-received, have performed disappointingly well with net outflows of nearly half a billion dollars since their launch. Nolan points out that as of August 30, there have been no flows into Ethereum products.

The impact of ETF outflows is amplified by the significant reduction in activity on the Ethereum mainnet. Data from TokenTerminal reveals that revenue generated from transaction and computational execution fees on Ethereum has dropped 99% over the past six months. This decline is largely attributed to the rise of Layer 2 scaling solutions, such as Arbitrum, Optimism, and Base, which are draining volume, usage, and capital from the mainnet. “It’s a momentary cannibalization,” NOLAN explained. The latter predicted a future differentiation where Layer 1 (L1) will be used for high value transactions, while Layer 2 (L2) will capture mass applications requiring fast and less expensive transactions.

Vitalik Buterin's comments and macroeconomic volatility

Beyond the technical factors, this bad period of Ethereum was also exacerbated by polemical comments and controversial actions from its leaders. Vitalik Buterin, co-creator of Ethereum, had, among other things, declared that “DeFi is unsustainable”, a statement that shook the crypto community and sowed doubts about the viability of many projects built on the Ethereum crypto. In addition, the Ethereum Foundation sold around $100 million worth of ETH. An operation that further fueled investor skepticism about the future of crypto.

The situation was further complicated by global macroeconomic instability. Dessislava LANEVA, a research analyst at Kaiko, noted that “the deterioration in global risk sentiment in August, driven by US growth fears as well as the unwinding of short-term yen carry trade positions, put additional pressure on ETH.” Investors have been moving away from risky assets. In addition, the ongoing US presidential campaign has also weighed on Ethereum. Some observers, such as Bitwise’s Matt HOUGAN, argue that the crypto is more exposed to political uncertainty than Bitcoin due to its central role in the smart contracts and decentralized finance ecosystem.

For now, caution is advised, but Ethereum's strong fundamentals and its leading role in the blockchain ecosystem suggest the potential for a significant rebound in the medium to long term.