Ether (ETH) fell short of a bullish breakout based on technical and on-chain analysis, suggesting that the consolidation below the $2,000 price level could continue in the medium term. At the same time, a lack of sellers and strong fundamentals will likely protect Ether from steep declines.

Ethereum encounters resistance at long-term bullish reversal points

ETH/USD price increased by 42.80% since the start of 2023 thanks to a short squeeze in the altcoin market, negative investor sentiment and low liquidity conditions. Based on on-chain and technical levels, the rally has paused at a crucial bull-bear pivot.

Glassnode’s Relative Unrealized Loss metric measures the loss scale on Ether holders’ books. The orange line represents the bull-bear pivot line, where consolidation above this level signifies bear trends and vice versa. Usually, the market begins bullish trends after a breakout from previous all-time highs or consolidation over long periods, signified by a steep decline in the Unrealized Loss metric.

Similarly, from a technical perspective, Ether bulls failed to overcome the resistance at 0.082 BTC, bringing the price back to the parallel trading range between 0.053 BTC and 0.082 BTC.

Will time be different?

Based on historic levels, Ether missed the previous bottom levels by a huge margin, the minimum percentage of supply in profit extended to 42.1% compared to the 20-30% tapped during previous bear markets. It suggests the likelihood of more pain ahead for ETH holders. However, on-chain trends show robust activity and buying, reducing the downside risk significantly.

The net position change of Ether on exchanges shows a stark difference between the current and previous bear markets. Between 2018 and 2020, Ether inflows to exchanges were significantly higher than outflows, indicating that many holders moved their coins to exchanges to sell. However, during the negative period of 2022, although the price dropped, exchange outflows remained strong, suggesting that the selling pressure is weaker in the current bear market.

The percentage supply of Ether locked in smart contracts tells a similar story, with no significant declines in Ether locked in smart contracts. The uptrend that began in late 2020 held strong through the downturns of 2022, suggesting that withdrawals are not likely anytime soon.

Ethereum has a lot going on as the network continues to evolve to support sustainable usage and yields for Ether holders. Ethereum’s shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS) in September 2022 was a momentous event for the network as it became environmentally friendly and, more importantly, reduced inflation.

Moreover, the EIP-1559 proposal implemented earlier in 2022 introduced burning of Etherum fees, which, combined with reduced issuance after the Merge, contributed to making the asset deflationary. The total Ether supply is down around 0.015% since the Merge.

However, CoinShares’ data of institutional flow into digital asset investment products shows that more sophisticated investors have yet to warm up to Ether, sticking primarily to Bitcoin. The year-to-date investment in Ether in 2023 has been only $8 million, compared to $158 million in Bitcoin and $23 million in Bitcoin shorts.

Regulatory clarity and Ethereum’s scalability challenges are likely the key reasons behind reluctance among institutional investors. The U.S. SEC recently fined Kraken $30 million for offering ETH staking, which the regulatory body deemed as being a security. 

As centralized service providers like Kraken, and possibly Coinbase are prohibited from offering these services, institutions may be reluctant to try decentralized liquid staking platforms like Lido and Rocket Pool.

The exuberant gas fees on Ethereum remains a prolonged challenge which is limiting mass adoption. The average transfer fee for ERC-20 assets on Ethereum ranges between $2 to $5 dollars, with simple swaps costing around $5 to $20.

These charges are considerably high compared to other chains and centralized exchange fees. While development has happened across the layer-2 space, the institutions appear to be in a “wait and see” mode as they analyze the development of the crypto space.