The Fed blocks Ethereum bullrun
2024-12-02

ATH 

On November 22, 2024, the price of bitcoin reached $99,588. The previous high, which was 4 years ago, was $69,000. Thus, the new price peak is 44% higher. Four years ago, the maximum price of Ethereum reached $4,868. If Ethereum rose in price like bitcoin is now, its price would reach $7,009. Ethereum has been expected to grow even more than bitcoin. However, this did not happen, and there are reasons for that.

 ETF 

Ethereum-based ETF products are less attractive to investors than Bitcoin-based ETFs. The difference is that the owner of ETH coins can apply staking and therefore receive additional income. Ethereum-based ETFs do not provide this additional income from staking. However, investors seem to have turned their attention to the asset in recent days.

On Nov. 29, 2024, investors bought $332.9 million worth of Ethereum-based ETFs. This is the largest sum invested in Ethereum via ETFs in history. On the same day, $320 million was invested in bitcoin-based ETFs. That is the first time in history that a greater amount was invested in Ethereum than Bitcoin using ETFs.



 DeFi 

Bitcoin is a store of value. Ethereum is also a store of value, but it offers more than that. Ethereum also supports DeFi transactions. Fees are charged for these transactions, and they require ETH. Low demand for DeFi services leads to low demand for ETH. However, this situation could change soon.

 Fed 

High interest rates from the US Federal Reserve have made DeFi lending less attractive. Data aggregator DeFiLlama released a report in 2022 in which they concluded that the decline in the DeFi market is due to the Fed's interest rate hike. The DeFiLlama report is freely available for download. The text I'm quoting is from page nine of their report.
 
Sadly, the fun times couldn't last forever. Inflation rose too high, and in 2022 the US Federal Reserve raised interest rates. When interest rates are high, borrowing money is more expensive, so investors and consumers are pushed to reduce spending. High interest rates also lead to higher treasury yields, so investors move money from other assets into treasuries. The Fed achieved its goal of lowering spending and fighting inflation. But this drove down token prices, which drove down DeFi yield and TVL. We can analyze historical data to find the exact point when the opportunity for yield in legacy markets flipped DeFi yield. Let's look at the tradeoff between investing in DeFi yields and US treasury bills. The chart below shows that in April 2022 median DeFi yield fell below the yield of 1Y US treasury bills. At this point, sophisticated investors who were farming DeFi yield and had access to US treasuries would be faced with the decision to either reallocate their capital or miss out on potential gains. Why take on risk in DeFi if you can earn more money in relatively risk-free
treasuries?
 


 Correlation 

TradingView is a very flexible tool. We can display the chart of the Fed's key rate (look for 'FEDFUNDS') and the DeFi sector chart (look for 'TOTALDEFI'). Note that there is an inverse correlation: when the Fed's key rate is high, DeFi market capitalization goes down, and the reverse is also true. When the Fed eventually started lowering the key rate, DeFi capitalization began to rise. This is not surprising, as there is a clear reason for this inverse correlation.



On September 18, 2024, the Federal Reserve lowered its key rate for the first time in a long time. As a rule, increases and decreases of the key rate are gradual. This was also confirmed by the head of the Fed, Jerome Powell, who stated that the Fed will continue to gradually reduce the key rate. In the past, the Fed also reduced the key rate gradually.

 Technical analysis 

The Bullish Pennant technical analysis pattern is currently forming, with a price target of $4,320.



 Risks 

Ethereum remains the only altcoin for which ETFs have been launched. However, the SEC may approve an ETF for its main competitor, Solana. This was mentioned in a recent article. This will most likely happen in August 2025, so there are still a few months remaining. However, it could happen sooner and unexpectedly. The emergence of a Solana ETF would be a negative event for Ethereum, as a significant portion of ETF investors may decide to diversify their risk, opting to own both ETH and SOL. Many could sell part of their Ethereum ETFs to achieve this.

 Summary 

The price of Ethereum depends on demand in the DeFi sector. Demand for services, such as lending, in the DeFi sector depends on the size of the Fed's key rate. As the Fed has started the cycle of gradually lowering the key rate, the demand for Ethereum should increase. The price of Ethereum should also increase. In the near future, the price of Ethereum is likely to reach 4320; however, this does not mean that the price growth will stop. Ethereum price growth will probably stop in August 2025 due to the emergence of Solana-based ETFs. In addition, previously, the cryptocurrency market repeated the cycle of price movement every 4 years, but the last cycle was shorter than the previous one. It is likely that this cycle of cryptocurrency price movement will end in the summer of 2025. For these two reasons, it is very risky to hold Ethereum until the end of 2025. I would prefer to sell Ethereum in July 2025 before the risky events.