Ethereum (CRYPTO: ETH) has been trending downward in 2022. As of this writing, it was down 21% for the year, while Bitcoin (CRYPTO: BTC) was only down 8%. Cryptocurrencies are generally very correlated with each other, so it should come as no surprise that ETH and BTC are down at the same time. However, it is a little bit unusual for ETH to be down so much more than Bitcoin. The general trend since Ether’s launch has been one of closing in on Bitcoin’s market cap. Generally, ETH has delivered higher returns than Bitcoin has over the former’s lifetime. That’s beginning to change. In this article I will explore some possible reasons why it’s happening.
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NFT fad waning
One possible reason why ETH is declining in price so much this year is that the NFT fad is waning. NFTs are unique tokens bought with Ether that point to images and other digital assets. You can think of NFTs as a form of digital art. People buy NFTs hoping to see them go up in value. They may also feel that an NFT confers “ownership” of the image that it points to. Whatever the case may be, NFTs were very popular last year. Some of them sold for over $10 million. It was a pretty popular fad. But today, it is waning. If you search ‘NFT’ on Google Trends, you will notice that search queries for the term have been declining since mid-January. NFTs are bought and sold with ETH, which was previously a factor driving demand for Ether. Now, NFTs are losing their cachet, and perhaps fewer people are buying ETH as a result.
Crypto market in general declining
Another factor contributing to the decline of Ether is a broader decline in the cryptocurrency market. As previously mentioned, cryptocurrencies are highly correlated with one another. Generally, whenever Bitcoin is going up, the most popular alt-coins are going up along with it. The reverse is also true. Bitcoin and most major cryptocurrencies are going down this year, so it should come as no surprise that ETH is going down. Its relative under-performance is a little harder to explain, but the NFT thing seems likely to be part of it. ETH was solidly out-performing Bitcoin in 2021, when the NFT trend was rising, so it seems logical that the decline in the popularity of NFTs this year is part of ETH’s decline.
Foolish takeaway
Ether is the #2 cryptocurrency for a reason. Boasting more transactions per second than Bitcoin, and with a huge developer community, it isn’t going anywhere. However, this year appears to be a bump in the road for the world’s most popular DeFi token. With NFTs fading out of favour, Ether is tanking. It’s a rough moment for Ether holders, but there is reason for optimism. Later this year, ETH’s blockchain will be getting upgrades that should take it to 100,000 transactions per second. That’s a huge improvement, and it may be just what’s needed to make ETH more popular than ever before.
