The Rise And Fall Of Ethereum: A Data Driven Story

The rise in popularity of Initial Coin Offerings in 2017 and 2018 created large buying pressure for Ethereum (ETH). Most token sales required that purchasers use ETH to participate in sales, driving the price up more than 100x. When demand for ICOs dried up, so did buying pressure for ETH, pushing the coin’s price down.

Demand dropped for Ethereum among ICO investors, as well as among ICOs themselves  —  which were forced to liquidate their funds which were raised in Ethereum to cover expenses. Most ICOs decided to hold funds in Ethereum rather than convert their raised capital to fiat. Many who had raised Ethereum during token sales when prices were over $1,000 were now sitting on piles of ETH valued at rapidly decreasing amounts. As a result, most ICOs were forced to liquidate larger and larger amounts of the token to cover their expenses.

A report by cryptocurrency research firm Delphi Digital, which examined 54 of the largest ICOs, found that roughly 60 percent of the total ETH raised by these projects has already been sent from their treasuries to exchanges. According to the firm’s Co-Founder, Medio Demarco, the analysis of these large token sales found that “a total of 16.3 million ETH was raised, of which 9.6 million ETH has already been sent to an exchange. We view this as a positive indicator given the amount of ETH that has already been liquidated, however, it remains to be seen what the net effect will be moving forward due to the lack of new token sales”. June 2018 was an inflection point where the amount sent to an exchange dwarfed any new inflows. This marked the beginning of a period where ETH saw a significant decrease in price.

While the majority of ICOs’ Ethereum funds have now been liquidated, the necessity to liquidate the remaining 40 percent could exert further downward pressure on the coin’s price.

Research by cryptocurrency analytics platform TheTIE.io found a very strong correlation between Ethereum and ICO tweet volumes. While the correlation since 2017 between ICOs and Bitcoin tweet volumes was just .24, the correlation between Ethereum and ICO tweet volume was .80.

In addition to its rapid decline in price, conversations around Ethereum have plummeted since mid-2018. After quickly rising in 2017, Ethereum tweet volumes remained relatively consistent through mid 2018, coinciding with continued demand for ICOs. As demand began drying up among investors looking to participate in ICOs so too did conversations around Ethereum with ETH tweet volumes free falling beginning in June 2018, falling 66 percent from highs.

Not only have the number of Twitter conversations around Ethereum decreased, but they are increasingly coming from a smaller percentage of users. At their peak in December 2017, 9,000 unique Twitter accounts discussed ETH on a daily basis, that number has since fallen below 3,000. The decline in Twitter users discussing Ethereum has moved in lock-step with market cap. 

Conversations Shifting Towards ERC-20 Tokens

Since August 2018, tweet volumes around the top ten ERC-20 tokens have begun increasing at a higher rate than Ethereum. While average tweet volume on Ethereum dropped by 42 percent, conversations on the top 10 ERC-20 tokens increased by 43 percent. Over that same period while the Top 10 ERC-20 only fell by 17.2 percent, Ethereum’s declined by 55.3 percent. It appears what was once a very strong correlation between both conversations and the prices of Ethereum and ERC-20 tokens has begun to decrease. This could signify that cryptocurrency investors are increasingly disconnecting ERC-20 tokens performance and usage with that of Ethereum.

“Most, if not all, ERC-20s have yet to create substantial transaction demand for ETH gas that would drive the price of ether. While certain DeFi projects have grown the demand for ETH through the offering of financial instruments, increases in pegged currencies, direct purchasing of ERC-20s through reputable exchanges, token economy development, et cetera, may lead to a lesser correlation in the price of these assets,” said Nir Kabessa, a partner at the digital asset investment firm Taureon

Silver Linings

While ICOs ultimately spawned the boom and bust of Ethereum, some signs of hope remain for the cryptocurrency. Delphi Digital found that the recent rise in popularity of Decentralized Finance (DeFi) applications including MakerDAO, Compound, and Uniswap has brought new demand for Ethereum with ETH staked in these applications exceeding $270 million. 

The announcement by BlockFi to offer accounts with 6.2 percent annual interest rate paid in either Bitcoin or Ethereum also presents a potential increased source of demand for ETH. 

A third positive sign is that sentiment on Ethereum is now experiencing its most prolonged period of positivity since 2017. The TIE found that average sentiment is a very strong indicator of price movement. Beginning in early January 2019, Ethereum average daily sentiment score began to turn positive and has remained strongly positive since then. The last time such a prolonged period of positive Ethereum sentiment occurred was in March 2018, when the coin’s market cap increased from $36 billion to $84 billion.

The Future

Major hurdles exist for Ethereum to regain its momentum. While the rise of DeFi, growing sentiment, and the BlockFi announcement offer glimpses of hope for the future, with a lack of demand the short-term outlook remains gloomy. The adverse affects on demand created by the decrease in popularity of ICOs and the disconnect between ERC-20 tokens and ETH itself outweigh the positives and are problematic for the coins short-term future. 

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