Ethereum price dragged down below $2K as US inflation hits highest level since 1991

Ethereum price dragged down below $2K as US inflation hits highest level since 1991

Ether (ETH) perhaps had the most bullish outlook entering the July session, with a key technical update dubbed EIP-1559, promising to make its native token ETH scarcer through the network's first-ever burning mechanism.

But so far into the month, the second-largest cryptocurrency by market cap has vastly tailed its top rival Bitcoin. The positive correlation was visible on July 13, following the New York opening bell, when Ether plunged below $2,000 to hit its two-week low in sync with Bitcoin, which slipped slipping below $32,500.

Our top trading bots

Ethereum price dragged down below $2K as US inflation hits highest level since 1991
ETH/USD vs. BTC/USD on Coinbase. Source: TradingView

As it happened, the ETH/USD exchange rate reached its intraday low of $1,961.10 following a 3.43% drop. The pair's modestly bearish move locked step with Bitcoin, which apprehensively fell as traders assessed the latest U.S. inflation data.

The U.S. consumer price index ticked up 0.9% in June to hit 5.4% year-over-year, marking its highest level since 1991. Traders sold off Bitcoin and other cryptocurrencies on the news, pointing to fears that a continuously rising inflation rate would prompt the U.S. Federal Reserve to withdraw its quantitative easing policies.

Macro inflation vs. Ethereum deflation

In detail, the minutes of the Federal Open Market Committee's June meeting revealed officials in favor of at least two rate hikes by the end of 2023, providing the inflation rate runs too hot above their 2% target. The central bank has been maintaining interest rates below 0.25% since March 2020, which sapped investors' dollar demand and, in turn, had boosted demand for so-called safe-haven assets, including Bitcoin.

Ether, whose one-year correlation coefficient with Bitcoin stands at 0.64, according to Crypto Watch, surged all across 2020 and in the first quarter of 2021 on similar macroeconomic fundamentals.

The cryptocurrency, however, logged better gains than Bitcoin, owing to its role in a flurry of booming crypto sectors, including decentralized finance (DeFi), nonfungible tokens (NFT), and stablecoins.

Ethereum price dragged down below $2K as US inflation hits highest level since 1991
Bitcoin's one-year correlation with Ethereum. Source: Crypto Watch

But the Ethereum network also suffered from technical setbacks in the form of a jammed bandwidth. An overloaded blockchain prompted miners—entities that process and add transactions to Ethereum's public ledger—to raise their fees. In some cases, users were forced to pay more gas fees than the amount they were transferring.

The problems appear to have come to a final resolution 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 includes five improvement proposals, expects to counter those inefficiencies.

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

It proposes to burn a portion of the fee collected in ETH, thus adding deflationary pressure on the cryptocurrency. In addition, the upgrade replaces miners with validators. In doing so, Ethereum requires each validator to lock at least 32 ETH to run its proof-of-stake network.

That also put a good portion of ETH supply out of circulation, making it as scarcer as Bitcoin. 

For Konstantin Anissimov, executive director at CEX.IO, rising macro inflation provides more bullish opportunities to Ether as much as it does to Bitcoin. He adds that he anticipates the ETH/USD exchange rate to hit $3,000 on an anti-inflation narrative.

"As things stand, the Federal Reserve has increased the size of its balance sheet from early 2020 to over $8 trillion—a substantial rise," he explained, adding:

"The reduced pricing is an avenue for market investors to accumulate the coins at a discount while trusting in their abilities to serve as the right hedge against the inherent inflation."

And so it appears, Ether accumulation is happening at a rapid pace. According to CryptoQuant, a South Korea-based blockchain analytics firm, the total ETH reserves across all the crypto exchanges have dropped by more than half in the wake of its Q2/2021 price correction from $4,384-top to $1,700-low.

Ethereum price dragged down below $2K as US inflation hits highest level since 1991
ETH all exchange reserves are declining since September 2020. Source: CryptoQuant

Correlation risks

Ether's correlation with Bitcoin remains a bottleneck as ETH eyes further highs. Nevertheless, Josh Arnold, a financial analyst associated with Seeking Alpha, highlighted that Ether and Bitcoin are sometimes negatively correlated. A 0.64 correlation efficiency is not perfect.

Arnold instead focused on Ether's price chart structure, noting that the cryptocurrency formed a descending triangle pattern upon topping out in mid-May 2021. Descending triangles are typically continuation patterns that lead the prices in the direction of their previous trends after a small period of consolidation.

Ethereum price dragged down below $2K as US inflation hits highest level since 1991
Descending triangle outlook based on Josh Arnold's trade setup. Source: TradingView

Arnold noted that Ether bulls need to hold Triangle support to maintain their upside bias or they would risk losing the market to bears. He explained:

"A descending triangle break to the downside would see Ethereum plumb new 2021 lows and try to find support again, but at much lower levels."

But given Ether's resilience against bears, Arnold anticipated that the cryptocurrency might end up rising higher. 

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

Read on relating to Cointelegraph
ChainSwap announces compensation and ‘deep audit’ plan after $8M exploit
Cross-chain asset bridge, ChainSwap, has announced a compensation plan for users after suffering an $8 million loss in its second exploit suffered this...
NYDIG and Q2 partner to enable Bitcoin trading for 18M US bank customers
New York Digital Investment Group (NYDIG) has partnered with Q2, a firm specializing in providing digital services to financial institutions, to provide...
Global banking regulator plans to hold consultation on crypto exposure
The Basel Committee on Banking Supervision has said it will be publishing a consultation paper aimed at banks reducing their risk of exposure to crypto. According...
Bitcoin dominance cycle suggests the 2017 crypto rally could repeat
For the purposes of historical comparison, it’s also worth noting that the pattern of the dominance chart currently looks much like it did during the earlier...
Coinbase stock plunges to record low, further decoupling from crypto
Shares of Coinbase Global Inc. tumbled to fresh lows on Thursday, as Wall Street investors continued to cycle out of high-flying tech stocks. The cryptocurrency...
Mass adoption looms as South America's second-largest company accepts crypto payments
On April 28, MercadoLibre (MELI), the largest Latin American online marketplace, launched a real estate section dedicated to cryptocurrencies. Although...
WeWork to accept crypto payments and hold them on its balance sheet
Coworking space giant WeWork is the latest company to announce plans to hold cryptocurrencies on its balance sheet.The SoftBank-owned commercial real estate...
Crypto wagering for online sports betting now legal in Wyoming
Wyoming has passed a new law legalizing online sports betting in the state with gamblers able to fund their accounts with bookmakers using cryptocurrencies.Governor...
Eastern Caribbean Central Bank's DCash digital currency goes live
The Eastern Caribbean Central Bank, the main financial institution of the Eastern Caribbean Currency Union, has launched DCash.The ECCB announced the launch...
XRP Climbs 11% In Rally - XRP was trading at $0.55921 by 06:59 (10:59 GMT) on the Index on Monday, up 11.01% on the day. It was the largest one-day...
Unpopular opinion? The problem with blockchain gaming is blockchain
The use of blockchain in crypto-based games could be a hinderance to the adoption as well as an exciting unique selling point. Now, before you start taking...
Cryptos Bring Money-Laundering To a New Level
Where money is, there is always a crime related to it. It has eternally been used by malicious individuals for various illicit purposes including terrorism...
20% Of Banks And Hedge Funds Are Interested in Trading Cryptos – Survey
Despite hazardous fluctuations, which have been shaking up the word of cryptos, bitcoin and its brethren have all the chances to succeed in 2018. The...
Liechtenstein Bank Allows Its Clients to Invest In Bitcoin
Another crypto-friendly bank spotted! While most of the financial institutions over the world are trying to bar themselves from the cryptocurrency market,...
Swiss Bank Account' & Risk For People: What US Treasury Secretary Thinks of BTC
Recently the US authorities started keeping an eye on bitcoin and even extended their wishes to become cryptocurrency watchdogs, as the country’s Commodity...