Ethereum Plummets Below All-Important $1,000 Mark. What Next?

It's probably too early to talk about an end to crypto pain.

Ethereum's (ETH) price fell as low as $896 over the weekend in what many have described as one of crypto's worst weeks ever. The top smart contract crypto fell to its lowest point in 18 months, pushed down by a combination of DeFi concerns and wider economic issues.

According to CoinMarketCap, Ethereum closed at $994 on Saturday -- down almost 80% on its high of $4,860 last November. Other cryptocurrencies have suffered even greater losses, and the overall market cap fell to its lowest point since January last year. Prices have recovered slightly since. At time of writing, Ethereum is trading at around $1,150 and other top cryptos are also in the geen.

Ethereum's price woes

Like many cryptocurrencies, Ethereum has struggled in the past six months. It has lost over 40% in the past month alone, and many analysts predict it could fall even further. So what's driving Ethereum's dramatic price drops? Here are three of the biggest factors.

1. The whole market is down

The Federal Reserve is taking drastic steps to curb inflation, such as its recent 0.75% interest rate hike. Not only does this mean investors are more risk averse right now, it has also sparked fears of a possible recession. This in turn puts pressure on riskier asset classes like crypto. According to data by CoinGoLive, over 98% of cryptos are down by more than 90% on their all-time highs.

2. Decentralized finance could be in trouble

The collapse of Terra's LUNA ecosystem shook the market in May, and we're still feeling the aftershocks. There's a lot of interconnectedness in the DeFi (decentralized finance) industry, which is fine when things are good but can cause a cascade of failures when things start to go wrong. Difficulties on one platform can easily put pressure on others, especially when prices are already so low.

Essentially, Terra may have triggered a domino effect. Popular decentralized lending platform Celsius has suspended withdrawals and it isn't clear how many others are in trouble. There are rumors circulating about crypto hedge fund Three Arrows Capital, and Babel Finance -- another crypto lender -- has also frozen withdrawals. DeFi users are braced for further upsets. Given that a large proportion of decentralized finance apps are on the Ethereum network, difficulties in DeFi aren't great for ETH.

3. Uncertainty over the Ethereum merge

Ethereum's merge is one of the most anticipated events in crypto this year. It will move Ethereum from a proof-of-work mining model to a much more sustainable proof-of-stake system. However, the switch has been delayed several times and this has contributed to Ethereum's price volatility. Right now, developers think the merge will happen in August, but they're reluctant to commit to a specific date.

If Ethereum's merge goes ahead as planned, this could have a positive price impact and is a key step, particularly for long-term investors. In the short term, be aware that the crypto industry is sometimes susceptible to a phenomenon called "buy the rumor, sell the news." Essentially, people speculate on high profile events such as significant technical upgrades, pushing the price to unsustainable levels. They then sell when the much-anticipated event does happen, causing the price to fall.

What next?

Many crypto investors are understandably eager to know when this period of bearish price action might end. It is one thing knowing that crypto prices could fall dramatically when you first buy crypto, it's quite another seeing the value of your portfolio decimated and wondering whether it might ever recover.

The challenge is that there are no guarantees. It's certainly unlikely we'll see any significant recovery in crypto prices until the economic situation changes and the Fed slows down its drastic economic tightening measures. But even looking longer term, cryptocurrencies have some serious hurdles to get over. A big one is increased regulation, which is definitely on its way. Another is discovering how deep the DeFi contagion will run. We don't know how many more platforms will fall.

These factors contribute to the increasing talk of another crypto winter, meaning prices could be depressed for some time to come and many crypto projects will fail. Bitcoin (BTC) and Ethereum are better positioned than most to survive a prolonged period of low prices. They are some of the most established projects and together account for almost 60% of the total crypto market cap.

All the same, there's a lot of uncertainty. Whether you're considering buying the dip or cutting your losses and selling, the key is not to rush into any decisions. Keep your eyes on the long term and consider where you think Ethereum might be in 10 or 20 years' time. If you do decide to buy Ethereum, only spend money you can afford to lose. That way you can benefit from long-term growth, but further price drops won't derail your finances.