Why Ethereum's Down 40% This Week

The leading smart contract crypto has struggled more than others.

Crypto prices have fallen dramatically this week -- almost all the top 100 cryptocurrencies are in the red and with many showing significant losses across the past seven days. Bitcoin (BTC) has fallen over 30% in a week and Ethereum (ETH) is down 40%. At one point, Ethereum nearly touched the $1,000 mark -- a significant drop from its November high of over $4,700. Read on to find out why the recent crypto crash hurt Ethereum more than many of its counterparts.

What's driving Ethereum's drop?

There are several reasons why Ethereum's price has fallen so much this week. Some are related to the wider market and economic conditions, while others are specific to Ethereum. Let's unpack some of them.

1. The whole crypto market is down

The crypto fear and greed index, which measures market sentiment, is currently at 7 -- the lowest it has been in years. This is a reflection of the widespread fear that crypto prices could fall even further. As central banks around the world introduce severe economic tightening measures to try to get inflation under control, riskier assets like crypto are suffering. Plus, fears of a recession and spiraling living costs mean people are more reluctant to buy crypto.

These extreme price conditions have a knock on effect on the decentralized finance (DeFi) industry, which -- as we've seen -- can quickly snowball. DeFi is a core component of the wider cryptocurrency market, and many DeFi apps are built on Ethereum. The question marks that hang over the future of several key players almost certainly feed into Ethereum's downward trend. In addition, these sudden price drops could trigger authorities to move faster with regulatory changes, which could also push prices even lower.

2. Delays to the Ethereum merge

Ethereum was the first cryptocurrency to introduce smart contracts and many applications are built on its network. However, network congestion and high gas fees have caused a number of developers and investors to seek alternatives. Until Ethereum can complete a staged upgrade to address these issues, it will continue to lose market share.

The Ethereum merge is a crucial milestone. The merge won't fix high gas fees or heavy congestion, but it is a key step on the road to the final upgrade, which will. The merge is a switch from a proof-of-work mining system to a proof-of-stake model, which is significantly more environmentally friendly. There's a great deal of excitement about the merge, but delays have also caused concern.

Most recently, Ethereum developers said they would delay something called the "difficulty bomb" -- built in code that aims to incentivize miners to move to the new proof-of-work system. Delaying the difficulty bomb has sparked fears that the merge may be delayed beyond the currently-hoped-for rollout in August.

3. Issues with staked Ethereum

There's currently a great deal of distrust of decentralized finance platforms. This follows the collapse of Terra (LUNA) and the decision by Celsius to pause withdrawals. Without going into too much detail, there's a form of staked Ethereum called stETH on a DeFi platform called Lido. What's got investors spooked is that the stETH has lost its peg -- meaning one stETH is no longer worth one ETH. According to a report from Huobi, there's a risk the declining stETH price could trigger a chain of liquidations, with "severe" consequences.

Bottom line

Markets don't like uncertainty, and there's a lot of it in the crypto market right now. For Ethereum, its upcoming merge piles uncertainty upon more uncertainty, which is one reason it has been overly impacted by the recent turbulence.

If the merge goes well, it will give both Ethereum and the whole market a much needed boost. But it is a major upgrade and there may well be technical difficulties, no matter how thorough the testing. Unfortunately, any glitches or additional delays put more pressure on Ethereum's price. The fear is that Ethereum won't be able to maintain its dominant position in the smart contract world if it can't address some of its issues.

Some investors may be tempted to buy the dip and pick up ETH at a relative discount. However, its price may fall further still, especially if the merge is delayed again. Make sure you understand the risks and only invest money you can afford to lose -- that way if Ethereum can't hold its leading position, it won't derail your finances.