Ethereum (CRYPTO:ETH) is in a pronounced downtrend this year. As of this writing, it was down 52% for the year — far more than Bitcoin (CRYPTO:BTC) in the same period. Everybody knows that this is a bad year for cryptocurrency, but the Ether crash has been far worse than what other cryptocurrencies have experienced. In this article, I will explore Ether’s dramatic crash and pose the question of whether it could go as low as $1,000.
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NFTs losing popularity
One of the reasons why ETH is crashing so hard this year is because the non-fungible token (NFT) market is collapsing. NFTs are digital tokens that point to other digital assets, like images. They became popular last year, as they provided people with the subjective sense that they “owned” the assets they referenced. This led to a perception that, through NFTs, you could “invest” in digital art and other such things.
Ether, as the token that was used to buy NFTs, exploded in popularity when NFTs became popular last year. Whenever anyone wanted to buy an NFT, they had to buy Ether first. That led to a lot of people buying up ETH, so they could use NFT marketplaces. Eventually, though, people realized that NFTs did not really confer “ownership” of anything and stopped buying them. That caused demand for ETH to tank.
Interest rates rising
As we’ve seen, the collapse of the NFT market reduced demand for Ether. That’s a token-specific factor contributing to the decline of ETH. Another factor is affecting the crypto market more broadly and taking ETH down along with Bitcoin: rising interest rates.
Higher interest rates make risky assets less appealing in direct proportion to how much they rise. The more return is available “risk free” through treasuries, the less sense it makes to assume risk in order to earn a return. This relationship can be expressed mathematically: in a discounted cash flow analysis (the type of analysis Warren Buffett uses), the value of a high growth asset takes a bigger hit than a slow growth asset when interest rates rise.
Cryptocurrencies don’t have cash flows. However, they are definitely risky assets, which means that they become less appealing when greater and greater returns are made available risk-free. Central banks around the world are raising interest rates this year in order to combat inflation. As a result, yields on treasuries, corporate bonds, and other low-risk assets are rising. Increasingly, investors are feeling like they will be able to beat inflation by investing in bonds. Because of this, it now seems less logical to invest in risky assets like crypto.
Foolish takeaway
2022 has been a wild year for Ether and for crypto as a whole. Down 52% for the year, ETH has really crashed. If interest rates are any indication, it has further still to fall. The Fed and the Bank of Canada aren’t done raising interest rates this year. More hiking is planned, and NFTs don’t look like they’ll return from the dustbin of history any time soon. So, it’s entirely possible that ETH will go as low as $1,000. There is very little to keep demand for the token high.
