3 Reasons Ethereum Has Fallen Back From Record Highs

Key Points

• Ethereum is the top-performing major cryptocurrency over the past 100 days.

• It hit a new all-time high of nearly $5,000 in late August.

• Lack of clarity over future rate cuts, and growing disenchantment with the crypto treasury company business model, are keeping Ethereum's price down.

• 10 stocks we like better than Ethereum ›

It took Ethereum (CRYPTO: ETH) nearly four years to do it, but the world's second-largest cryptocurrency finally hit a new all-time high of $4,954 on Aug. 24. That eclipses its old all-time high of $4,878 that dates back to November 2021.

However, cryptocurrencies are notoriously volatile, and Ethereum has already given up some of its massive gains. It's currently trading around $4,300, and investors are beginning to question if Ethereum has anything left in the tank for the remainder of the year. Here's why they're concerned.

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Ethereum treasury company hype

Ethereum's remarkable summer rally, which saw it explode in price from $1,800 to nearly $5,000, started in early May. Over the past 90 days, Ethereum is up a sizzling 73%. That's tops among all major cryptocurrencies.

The summer rally coincides with the high-profile launches of new publicly traded Ethereum treasury companies that are designed to do just one thing: Buy Ethereum. Borrowing the business model already used for Bitcoin (CRYPTO: BTC), these companies raise capital from outside investors, and then immediately plow that money back into Ethereum.

All this new buying pressure has created a lot of buzz and hype around Ethereum. That's especially the case since luminaries from the worlds of crypto and Wall Street were involved in the launch of these companies. SharpLink Gaming (NASDAQ: SBET), for example, appointed Ethereum co-founder Joseph Lubin as its chairman in May. For its part, Bitmine Immersion Technologies (NYSEMKT: BMNR) appointed Wall Street strategist Tom Lee of Fundstrat as its chairman at the end of June.

These two companies are locked in a race to see who can stack the most Ethereum. But if you think about it, their transformations into Ethereum treasury companies don't really make a lot of sense. SharpLink Gaming was a company that provided affiliate marketing services to sports betting and online casino sites, while Bitmine Immersion Technologies was a Bitcoin mining company.

Image source: Getty Images.

So, in many ways, the shine has already worn off the crypto treasury company business model. It would be one thing if these companies were funding Ethereum purchases with cash flow from operations, but they are instead raising money from investors. That introduces a whole new element of risk into the equation.

Interest rate concerns

The second major factor weighing on Ethereum right now is interest rates. The market was pricing in a major easing by the Federal Reserve. In fact, Ethereum hit its new all-time high just hours after Fed Chair Jerome Powell hinted at future interest rate cuts. These rate cuts are good for crypto because they make risky assets more attractive to investors.

But in the week following the Fed chair's Jackson Hole remarks, sentiment in the market has shifted once again. That's because, instead of an aggressive series of rate cuts, there may only be a single rate cut. Moreover, the ongoing tussle between the White House and the Fed is weighing on crypto markets right now. So the market may have gotten ahead of itself in pricing in rate cut expectations.

Lack of a real catalyst

Finally, Ethereum lacks a specific catalyst to push it higher in the coming months. There's no good reason -- beyond positive market sentiment -- why it should be increasing in price right now. Much of the buzz around Ethereum this summer has centered around all the new pro-crypto legislation coming out of Congress. New stablecoin legislation, for example, is good for Ethereum because it remains the top blockchain for stablecoins.

But it's not like Ethereum has announced any new product launches recently. The last tech upgrade happened in May, and that's old news now. Ethereum already has spot ETFs, so there's nothing really happening on that front either. At best, one could argue that new regulatory clarity around crypto staking could make these spot ETFs attractive to investors.

In reality, the spike in Ethereum's price this summer seems to be a bit of circular logic: The price of Ethereum is going up because more money is flowing into Ethereum, and more money is flowing into Ethereum because its price is going up. But what happens if the price of Ethereum is no longer going up?

Should you buy Ethereum now?

If Ethereum were an actual company, I would feel more comfortable about its future prospects. But it's a decentralized, user-powered blockchain network, making it difficult to manage. There is some leadership at the top, but there is no CEO, no corporate headquarters, and no formal strategy that must be followed.

So there's no guarantee that Ethereum will double down on stablecoins or go all-in on decentralized finance (DeFi). That seems to be what Wall Street analysts want it to do, but they can't force Ethereum's hand. Thus far, Ethereum co-founder Vitalik Buterin has shown very little interest in transforming Ethereum into a "casino" for Wall Street investors.

So, for now, it may be time to take some money off the table and wait for a new catalyst to appear. Ethereum remains a very attractive long-term investment prospect, but if you're looking for short-term gains to end the year with a bang, you might want to look elsewhere.

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Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.