Why ETH is in trouble…

Crypto Buckets
Sep 5, 2018 · 6 min read

The price of ETH is seriously in trouble of a major breakdown for a variety of fundamental and technical reasons. Let me go through my thesis a step at a time starting first with the Fundamental picture and then finishing with the technical.

Let me first state the last thing I personally want to see is ETH break down further. Any major declines in ETH are reflected even more severely in all the ERC-20 tokens which have much smaller market caps. But looking at the ETH market without bias it is obvious we are at a critical point.

Firstly the fundamental view.

Like all markets the fundamental view comes down to the age old tenets of supply and demand.

It will come as no surprise at all that the ICO funding market has dried up in a huge way compared to the 2nd half of 2017. According to Business Insider: One in 2 ICOs failed in the 2nd quarter of 2018 — and those that succeeded suffered huge losses. This is relevant because a huge portion of the demand for ETH in late 2017 and January 2018 was from 2 sources. The 1st being ICOs and the 2nd being Crypto Collectibles (most famously CryptoKitties).

Most ICOs are launched (or slated to launch) on the Ethereum Network and therefore are funded using ETH. Buyers of the ICOs take there fiat currency and convert it to ETH and then pledge it to the ICO. This created huge demand for the ETH token. With the huge drop off in ICO funding in 2018 the ETH token simply hasn’t had the demand it needed to raise prices. This slackening demand also explains why ETH has not had any significant bounces since April and why it has suffered much worse than Bitcoin. Bitcoin still has modest demand as a medium of exchange and also is the funding currency of many Crypto Trading platforms such as Bitmex and Bitflyer. These 2 platforms alone add Billions of dollars a day in demand for Bitcoin.

On top of the slackening demand ETH has the further problem of ICOs that raised Billions of dollars in ETH in 2017 and early 2018 now having to cash out that ETH into fiat for the day to day expenses of running a start-up. This again has added fuel to the fire. The real kicker and the fundamental reason why further losses could be ahead is that as the Dollar value of ETH has dropped those same ICOs find themselves with less funding than they originally raised. This then creates a double edged sword so to speak of ICOs having to decide whether to cash out there ETH (to protect themselves of further losses) or hold and maybe have the losses exacerbate. The result has been stronger and stronger declines on each wave down as ICOs panic and quickly dump Millions of $ worth of ETH into the market at a time.

Fundamentally things don’t look good.

Technicals

Unfortunately the technical outlook is in just as precarious position.

Looking at the Daily chart of ETH/USD below we can see the price has been stuck on the 2017 trend line for 23 days now with no meaningful break upwards. Despite the fact that both the Bollinger Band and RSI technical indicators trended higher the price was never able to break up. Now we see these same technical indicators are breaking their rising trend lines which could indicate ETH is not far away from breaking below the purple line it has held for the better part of the last month. Also of note is that margin longs (Long positions bought with borrowed money) is at an all time higher. As we know from trading history those that borrow money from exchanges to trade are usually those that can least afford to lose it. If this price does break strongly below the trend line then most if not all these margin longs will be in serious trouble and have to dump or be liquidated. This will add further fuel to the fire.

ETH/USD in a technically precarious position

Then on the next chart below we have the ETH/BTC technical position. ETH began trading against BTC about 12 months before it traded against USD so it has a longer history and more data. Plus Leveraged Trading Exchanges like Bitmex have had ETH/BTC trading for much longer then ETH/USD. As such the technical picture on ETH/BTC is considered more important for the long term price than ETH/USD.

If we look at the chart we see price is just like in the other pair right on a trend line this one dates back even further than the last as it goes all the way back to mid 2016. Couple that with the fact it is also perfectly sitting on top of the 0.786 Fibonacci retracement. This technically is another huge line of support. If price falls against USD it will very likely fall against BTC and this will exacerbate the selling even more as many professional traders of Bitmex will jump on the ETH/BTC short.

ETH/BTC sitting on 2016 support. If it breaks look out below.

These 2 charts show a simple technical breakdown of ETH position. Just to add 1 further evidence is if we look at a side by side comparison of ETH and BTC over the last week we can see that even as BTC has risen ETH has dropped.

BTC making higher lows (sign of an uptrend)
https://www.tradingview.com/x/pIjGgmg5

ETH making lower highs (sign of a downtrend)
https://www.tradingview.com/x/VqKAUcLb/

So what is the point of all this analysis?

Well right now there are only 2 options. None of which may be very appealing and all carry risk (like everything in life). The first is the most obvious option which is to do nothing and firstly hope that technically the support holds and this is the low. This then would raise all the alt coins too as they are linked to the ETH price. Also at the same time if the worst happens and ETH collapsing doing nothing is still a viable option if you have the patience and belief to just wait it out. A crash now would likely add 6 to 12 months to the time frame before you would expect to see prices back above ICO levels.

The 2nd Option which is likely out of the cards but can be mentioned anyway is to slowly try and sell off a small portion of the ERC-20 tokens and use that money to hedge by going short ETH/USD on Bitmex. Doing this will guarantee that a portion of your funds will be in profit. If ETH drops (and therefore the altcoins tumble with it) you will profit from the ETH/USD shorts hopefully to the amount or greater than you lose on the alt coins. If ETH/USD rises you lose out on the short but will make profit on your alt coins. The altcoin profits should cover the losses you make on ETH and then some. This is how professionals manage there positions but has to be carefully planned.

Last point

Nobody knows this more than me but as the proverb states “If you keep doing what you’ve always done you will get what you’ve always got.” So far in 2018 the only strategy has been to hold and hope for things to turn around. This has created a massive waiting game which may have much more time to come. It has also hugely reduced the value of the portfolio. It may not be the worst thing to consider a hedge by putting on a short ETH/USD. It’s easy to just write this off as something you won’t even consider. But sitting down and working out the numbers and then making a decision certainly won’t hurt. As Ray Dalio said in the decision making chapter in ‘Principles’

“The biggest threat to good decision making is harmful emotions. Great decision making is a two-step process; Firstly learning and then deciding.”

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