Here's the Reason Ethereum Tanked Today

Ethereum (CRYPTO: ETH) is the world's second-largest cryptocurrency, and as such, is one of the most-watched tokens in the market. So, when Ethereum plunges 5.5% over 24 hours (as of 6:30 p.m. ET, it has), investors take notice.

Today's price action reflects the sort of marketwide panic we've seen become pervasive in recent days. Many corners of the more risk-aggressive areas of the market, from unprofitable tech companies to the world's most profitable AI companies, are coming under pressure.

Much of this view appears to be centered on the idea that spending levels are far too high today relative to the uncertain profit outcome that may be years away. And while most of the heavy spenders on data center buildouts and the AI revolution overall have very deep pockets, the reality is that valuations are also near historic levels, as measured by a range of different metrics.

But today, that doesn't appear to be the whole story when it comes to Ethereum. Here's what I'm seeing taking place under the hood.

Unwinding of leveraged bets is driving big downside in Ethereum

Source: Getty Images.

Today's price action in Ethereum is undoubtedly being impacted by the moves we're seeing in most risk assets today.

But one of the unique factors that makes crypto such an interesting sector is the amount of leverage that's used to trade these digital assets. Via perpetual futures, a form of derivative, investors can take leveraged bets on price moves that can pay off big time (if they're directionally correct). Some investors use these for hedging purposes (those with large holdings). However, many others use these vehicles to trade or speculate on near-term price fluctuations of specific tokens.

Looking at liquidation data for Ethereum today, which represents leveraged bets on Ethereum that get unwound, long liquidations (bullish bets that have blown up) total nearly $150 million at the time of writing. That's a big spike from the levels typically seen over a 24-hour period.

Some of this leverage unwinding can be viewed as a positive development, with speculators being forced out of the picture in the near term. However, the fact remains that these high levels of derivative usage for Ethereum and other top tokens have stayed in place, and that will likely continue to be the case moving forward.

As such, today's price action is telling and may be concerning for many in this space, given Ethereum's size and importance to the overall sector.

Chris MacDonald has positions in Ethereum. The Motley Fool has positions in and recommends Ethereum. The Motley Fool has a disclosure policy.