Ethereum price fell below $ 2,000 as U.S. inflation hit its highest level since 1991


Ether (ETH) had perhaps the most optimistic outlook at the start of the July session, with a major technical update called EIP-1559 that promised to tighten its ETH native token through the network’s very first burning mechanism.

But well into the month, the second largest cryptocurrency by market capitalization has left its top rival Bitcoin far behind. The positive correlation was evident on July 13 after the opening bell in New York, when Ether fell below $ 2,000 and hit its two-week low in sync with Bitcoin, which slipped below $ 32,500.

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ETH / USD vs. BTC / USD on Coinbase. Source: TradingView

In fact, after falling 3.43%, the ETH / USD exchange rate hit its intraday low of $ 1,961.10. The pair’s modest downside paired with Bitcoin, which fell anxiously as traders valued the latest US inflation data.

The US consumer price index rose 0.9% in June to hit 5.4% year-over-year, the highest level since 1991 when the US Federal Reserve pulled out of quantitative easing.

Macroinflation vs. Ethereum Deflation

In detail, the minutes of the June meeting of the Federal Reserve’s Open Market Committee showed that officials are in favor of at least two rate hikes by the end of 2023, assuming the inflation rate is too hot above its 2% target. The central bank has kept rates below 0.25% since March 2020, which had weakened investor demand for dollars and in turn increased demand for so-called safe-haven assets, including Bitcoin.

Ether, whose one-year correlation coefficient with Bitcoin is 0.64 according to Crypto Watch, rose sharply throughout 2020 and the first quarter of 2021 due to similar macroeconomic fundamentals.

However, the cryptocurrency has seen better gains than Bitcoin because of its role in a flurry of booming crypto sectors, including decentralized finance (DeFi), non-fungible tokens (NFT), and stablecoins.

The one-year correlation of Bitcoin with Ethereum. Source: Crypto Watch

But the Ethereum network also suffered from technical setbacks in the form of congested bandwidth. An overloaded blockchain caused miners – companies that process transactions and add them to Ethereum’s public ledger – to increase their fees. In some cases, users were forced to pay more gas fees than they paid.

The problems seem to be finally resolved as Ethereum intends to switch its protocol from a miner-friendly but energy-intensive proof-of-work to a faster and cheaper proof-of-stake. In detail, the so-called London hard fork, which contains five suggestions for improvement, is intended to counteract these inefficiencies.

One of the enhancement protocols called EIP-1559 introduces a new fee structure to make Ether less inflationary.

It suggests burning some of the fee charged at ETH, which increases deflationary pressures on the cryptocurrency. The upgrade also replaces miners with validators. Ethereum requires every validator to block at least 32 ETH in order to operate its proof-of-stake network.

This has also withdrawn a good part of the ETH offer and is therefore as scarce as Bitcoin.

For Konstantin Anissimov, Executive Director at CEX.IO, rising macroinflation offers both Ether and Bitcoin more upward trends. He adds that he expects the ETH / USD exchange rate to hit $ 3,000 due to an anti-inflation narrative.

“From today’s perspective, the Federal Reserve has increased its balance sheet to over $ 8 trillion since early 2020 – a significant increase,” he said, adding:

“The reduced price is a way for market investors to accumulate the coins at a discount while having confidence in their ability to serve as a proper hedge against the inherent inflation.”

And so it seems that the accumulation of aether is happening at a rapid pace. According to CryptoQuant, a South Korea-based blockchain analysis company, the total ETH reserves on all crypto exchanges fell by more than half as a result of the price correction in Q2 2021, from $ 4,384 to a low of $ 1,700.

ETH all foreign exchange reserves have been declining since September 2020. Source: CryptoQuant

Correlation Risks

The correlation of Ether with Bitcoin remains a bottleneck as ETH targets further highs. Even so, Josh Arnold, a financial analyst associated with Seeking Alpha, pointed out that ether and bitcoin are sometimes negatively correlated. A correlation efficiency of 0.64 is not perfect.

Arnold instead focused on Ether’s price chart structure, noting that the cryptocurrency formed a descending triangle pattern after its peak in mid-May 2021.

Descending triangle outlook based on Josh Arnold’s trading setup. Source: TradingView

Arnold noted that ether bulls must hold triangle support to maintain their upward tilt or they would risk losing the market to bears. He explained:

“A descending triangle break to the downside would cause Ethereum to sound out new lows by 2021 and seek support again, but at much lower levels.”

However, given Ether’s bear resilience, Arnold assumed the cryptocurrency could end up rising higher.

The views and opinions expressed are those of the author only and do not necessarily reflect the views of Every step of investing and trading involves risk, so you should do your own research when making a decision.