Why is the Ethereum price down 48% this year?

Higher interest rates increase the appeal of safer investment assets like bonds and cash deposits.

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Key points

  • The Ethereum price has almost halved in 2022 
  • Cryptos have sold off alongside other risk assets 
  • Investors are concerned about the potential of large interest rate hikes 

The Ethereum (CRYPTO: ETH) price has almost halved since 1 January.

Down another 4.1% over the past 24 hours to US$1,954 (AU$2,793), the world’s number two crypto by market cap has lost 48% of its value in 2022.

And crypto investors who bought on 16 November last year, when the Ethereum price was trading at all-time highs of US$4,892, will be sitting on losses of just over 60%.

While it’s maintained its number two ranking, Ethereum’s market cap has dropped to US$236 billion from well over half a trillion dollars at its peak.

Why is the Ethereum price falling?

Ethereum, if you’re not familiar, is the biggest blockchain network in the world enabling the decentralised execution of smart contracts. And it’s this real world applicability that many see as key to its long term value.

Crypto enthusiasts have been keenly awaiting the coming merge, which will see Ethereum shift from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus to verify transactions. This will greatly reduce the blockchain’s energy use and reduce costs.

Many analysts also expect the pending switch to PoS to send the Ethereum price higher. While that may still happen, it certainly hasn’t yet.

Instead, prices have been falling as cryptos have been moving closely in line with risk assets, like high growth tech shares, this year.

As David Donabedian, chief investment officer of CIBC Private Wealth Management pointed out, “I think it will continue to trade with the equity market and risk assets. That’s the big lie that’s been exposed, the idea that it’s some new asset class that’s going to help diversify your portfolio has been blown to smithereens.”

As for risk assets, you need to look no further than the performance of the tech-heavy Nasdaq this year.

With investors selling risk assets over concerns about the potential of large, rapid interest rate increases, the Nasdaq has dropped 27.9% year-to-date.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Ethereum. The Motley Fool Australia has positions in and has recommended Ethereum. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

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