How low can Ethereum price drop against Bitcoin amid DeFi contagion?

Ethereum’s native Ether (ETH) token is down over 35% against Bitcoin (BTC) since December 2021 with further downside potential in the coming months.

ETH/BTC weekly price chart. Source: Trading View

ETH/BTC Dynamics

The uptrends in the ETH/BTC pair generally suggest a growing risk appetite among crypto traders, where speculation is more focused on future Ether valuations than on holding their long-term capital in BTC.

Conversely, an ETH/BTC bear cycle is usually accompanied by falling altcoins and declining market share for Ethereum. As a result, traders seek safety in BTC, showing their sense of risk within the crypto industry.

Elimination of Ethereum TVL

Interest in the Ethereum blockchain has skyrocketed during the pandemic as developers have started turning to it to create a wave of so-called decentralized finance projects, including peer-to-peer exchange and lending platforms.

This led to a total value locked (TVL) boom in the Ethereum blockchain ecosystem, from $465 million in March 2020 to $159 billion in November 2021, up more than 34,000%, according to DeFi Llama data.

Ethereum TVL performance since 2019. Source: DeFi Llama

Interestingly, ETH/BTC jumped 345% to 0.08, a 2021 peak, over the same period, given an increase in demand for transactions on the Ethereum blockchain. However, the pair has since fallen over 35% and was trading at 0.057 BTC on June 26.

The drop in ETH/BTC coincides with a massive drop in Ethereum TVL, from $159 billion in November 2021 to $48.81 billion in June 2022, driven by contagion fears in the DeFi industry.

Additionally, institutions have withdrawn $458 million this year from Ethereum-based investment funds as of June 17, suggesting that interest in Ethereum’s DeFi boom has waned.

Bitcoin in trouble but stronger than Ether

Bitcoin faced smaller downsides compared to Ether in the ongoing bear market.

The price of BTC has fallen almost 70% to around $21,500 since November 2021, compared to a 75% decline for Ether over the same period.

Additionally, unlike Ethereum, bitcoin-focused investment funds have seen inflows of $480 million year-to-date, showing that BTC’s decline has done little to curb its demand from institutional investors.

Investments move in and out of crypto funds by assets. Source: CoinShares

ETH/BTC Downside Targets

Capital flows, coupled with growing mistrust in the DeFi sector, could continue to benefit Bitcoin over Ethereum in 2022, driving further downside for ETH/BTC.

Related: Swan Bitcoin CEO vs. Crypto Lenders: Users Are Well Undercompensated for Risk

From a technical perspective, the pair held above a confluence of support defined by an uptrend line, a Fibonacci retracement level at 0.048 BTC, and its 200-week exponential moving average (EMA over 200 weeks; the blue wave in the chart below) near 0.049 BTC.

ETH/BTC weekly price chart. Source: Trading View

In a rebound, ETH/BTC could test the 0.5 Fib line next near 0.062. Conversely, a decisive break below the confluence of support could mean a drop towards the 0.786 Fib line at 0.027 in 2022, down more than 50% from today’s price.

The ETH/BTC breakdown could coincide with an extended decline in the ETH/USD market, primarily due to the Federal Reserve’s quantitative tightening that has recently driven crypto prices lower against the US Dollar.

Conversely, weaker economic data could prompt the Fed to slow down its tightening spree. This could limit the downside bias of Ether and other crypto assets in the dollar market, according to Informa Global Markets.

The firm noted:

“Macroeconomic conditions need to improve and the Fed’s aggressive approach to monetary policy needs to ease before crypto markets bottom out.”

But given that Ethereum has never regained its all-time high against Bitcoin since June 2017 despite strong adoption, the ETH/BTC pair may remain under pressure with the 0.027 target in sight.

The views and opinions expressed herein 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.

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