Almost exactly one year since it pulled off The Merge, Ethereum (ETH -0.71%) seems to be falling out of favor with crypto investors. After a fast start to the year, Ethereum is now down 10% over the past 30 days and more than 20% from its mid-April highs. Moreover, some investors are warning that Ethereum could have further to fall before it recovers to the $2,000 price level.
For investors thinking about "buying the dip" on Ethereum, there are two major points of concern to consider. Let's take a closer look.
Drop in user activity and transaction volume
First and most importantly, there has been a significant decline in transaction volume and overall activity taking place directly on the Ethereum blockchain. For example, transaction volume recently hit a nine-month low, while daily transaction fees recently hit an eight-month low. The growing consensus seems to be that users have lost interest in the Ethereum blockchain, and that they may be moving elsewhere.
If true, that could be worrisome, because it could mean a long-term decline in areas such as non-fungible tokens (NFTs), where Ethereum has historically been dominant. Using any type of valuation model, you would then need to downgrade Ethereum's future prospects, resulting in a lower long-term price target.
Image source: Getty Images.
However, there could be a plausible explanation for the drop-off in transaction activity: Users are simply choosing to execute their transactions on faster, cheaper Layer 2 blockchains that sit on top of the core Layer 1 Ethereum blockchain. As a result, all Ethereum-related activity is simply not being captured by traditional metrics.
For example, the buzziest blockchain of the summer was Base, the new blockchain project from Coinbase Global (COIN 5.68%). Well, Base just so happens to be a Layer 2 scaling solution for Ethereum. And there are several other Layer 2 blockchains that are performing well right now, suggesting the overall Ethereum ecosystem is still in good shape.
Selling by insiders and whales
The other major factor to consider is the sudden turn in investor sentiment about Ethereum that started to take place around mid-April. At the time, Ethereum was trading around $2,140, and was up big for the year. But there has been a steady wave of selling by so-called Ethereum "whales" (those holding between 10 ETH and 10,000 ETH in their crypto wallets) over the past four months. Theoretically, these whales are the smart money in the crypto market. If they are selling, what do they know that we don't?
Perhaps even more worrisome, Ethereum co-founder Vitalik Buterin could be among those who are selling off their Ethereum positions. After monitoring the multiple public wallets that Buterin uses, crypto tracking services have found that Buterin has transferred nearly $6 million in Ethereum to other crypto wallets over the past month. Some have interpreted this to be a red flag, similar to corporate insiders selling their shares when they know the price is headed down.
But, again, I think there's a plausible explanation here. The sell-off in mid-April also coincided with the Shapella tech upgrade, which made it possible for investors to remove their staked Ethereum for the first time. In March and April, there were numerous concerns that this could lead to selling pressure on Ethereum, as many early Ethereum backers locked in profits on their positions. That's probably what's happening now.
And what about Buterin? I hardly think he's panicking about the price of Ethereum. Instead, a better explanation is that he's simply redistributing his funds among different crypto wallets in order to protect them from hackers and cyber criminals. This is standard practice in the crypto industry.
Is the market overreacting?
Overall, I think this could be a classic "buy the dip" opportunity for Ethereum. From my perspective, the crypto market seems to be overreacting to the downside, viewing each new piece of news as more proof that Ethereum has suddenly lost its mojo.
But guess what? Ethereum is still best-in-class in just about every business segment, including NFTs and decentralized finance (DeFi). It is still seeing a strong upswing in developer activity, and Buterin has already shared a long-term roadmap for Ethereum that contains even more upgrades, improvements, and performance tweaks. And while Bitcoin (BTC -2.32%) may be getting all the attention from institutional investors now due to the imminent launch of a spot Bitcoin exchange-traded fund, that doesn't mean that they have forgotten about Ethereum.
As a long-term investment play, then, Ethereum still makes a lot of sense. If you believe that the market is overreacting right now, buying the dip now could be a way to add to your Ethereum position at a lower price.
