According to the latest Bloomberg report on digital assets, another major drop in the US stock market could leave Ethereum’s native token Ether (ETH) in a similar downtrend.
Etherum Faces Global Recession Risks
Mike McGlone, senior commodities strategist at Bloomberg Intelligence, expects U.S. equities to face downward pressure against the prospects of ongoing spikes in energy prices and their potential to trigger a 2008-like global market recession
“The war in Ukraine and spiking crude oil are a powerful combination for a global recession,” wrote McGlone in the report, adding that top cryptocurrencies such as Bitcoin and Ether could also come under initial pressure.
WTI crude oil weekly price chart. Source: TradingView
The correlations between US stock indices and top cryptocurrencies have only increased during the ongoing global market disruption and conflict between Ukraine and Russia.
Notably, Ether’s correlation efficiency with the tech-heavy Nasdaq 100 rose to 0.93 four days after Russia invaded Ukraine, but has since corrected to 0.67. An absolute value of 1 means the two assets move perfectly together.
ETH/USD daily price chart showing the correlation with Nasdaq 100. Source: TradingView
McGlone saw Ether trading in the middle of a range defined by its 100-week exponential moving average (100-day EMA; the red wave in the chart below) near $6,000 and its 30-week EMA (the green wave) near $2,000. He also expects significant selling pressure at the $4,000 mid-term resistance level.
ETH/USD Weekly Price Chart. Source: Bloomberg Intelligence
“Our image shows Ethereum roughly in the middle of the range,” the strategist wrote, claiming that “if the stock market moves one more leg lower, Ethereum is more likely to revisit the bottom” near $2,000. He added:
“If stocks fall quickly, Ethereum could repeat last summer and revisit around $1,700.”
Ethereum TVL Share Falls to Record Lows
The latest data shows that Ethereum’s market dominance is also giving way to competitors such as Cardano (ADA), Solana (SOL), Avalanche (AVAX) and Terra (LUNA).
The share of total value locked (TVL) on the Ethereum network fell below 55%, its lowest level ever, from 97% in early 2021, according to data from DeFi Llama.
Share of total value locked by chain. Source: Defi Llama, Galaxy Digital Research
Tom Dunleavy, a researcher at Messari, notes that new layer-one blockchains are relatively “faster, cheaper, or offer a more attractive reward structure” than Ethereum.
Nevertheless, he adds that it would be difficult to completely overtake Ethereum and Ethereum Virtual Machine (EVM), a software platform to create decentralized applications (DApps), because of the first-mover advantage.
“The advantage of the EVM has been such that major competitors are using or bridging the EVM, rather than trying to compete against each other without this capability,” Dunleavy wrote, adding:
“Even competitors that held out, such as Solana and Cardano, have recently added or added EVM compatibility (Terra is the notable exception). In many cases, the EVM has already cemented itself through its network effects.”
But most of the so-called “Ethereum killers” except Terra have fared much worse so far in 2022 as they faced geopolitical conflict, energy crises and risks of interest rate hikes.
For example, Solana and Cardano were down more than 50% year-to-date from Ether’s 30% price drop. The avalanche price fell by 37% in the same period.
Can Etherum regain market share?
However, not everyone expects the declining trend in Ethereum’s TVL market share to continue. Marcus Sotiriou, an analyst at GlobalBlock, expects Ethereum to regain its dominance if it transitions to proof-of-stake from its current proof-of-work protocol later this year.
“This is because it should drastically reduce transaction costs on the Ethereum network, which is Ethereum’s biggest drawback right now,” he said. told Business Insider earlier this month. As of now, Ethereum is working on a price increase model, leading to highly volatile transaction costs.
In August 2021, the network underwent a so-called “London hard fork” using a key EIP-1559 protocol. In particular, the EIP-1559 enables the Ethereum protocol to burn off gas costs, meaning some of the stock of Ether will be permanently out of circulation.
Related: Buybacks and Burns: What Does It Mean in Crypto?
“Bitcoin and Ethereum remain in the early days of adoption, with increasing demand versus decreasing supply and related price implications,” explains McGlone, adding:
“Our bias is why it’s complicated — unless something improbable reverses the spread of the nascent technology, prices should go up.”
The strategist also expects Ether’s correlation to the US stock market to decline as well as a result of so-called ‘decreasing relative risk’.
Ethereum Volatility vs. the Nasdaq. Source: Bloomberg Intelligence
“The relative risk of the nascent technology/assets is now close to 3x and will continue to fall, especially as the war increases recession risk and stock market volatility,” he claimed.
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