While I’m a long-term believer in cryptocurrencies, particularly in popular, well-established names like Ethereum (CCC:ETH-USD), I must look at the market objectively. And I’m going to get straight to the point. Since the underlying blockchain technology is essentially open source, there’s no way to capitalize directly off the innovation. Thus, what we’re left with is trading sentiment — and that sentiment doesn’t look good.
You can get angry. You can call me a fool. But those actions won’t change whatever is driving the current trajectory of Ethereum. And if you’re one of those people that follow seemingly profound but usually unhelpful sayings such as, “let the market tell you what the market is doing,” then ETH is definitely flashing a warning sign.
Most notably, Ethereum at the time of writing is struggling just a hair above the $3,200 level. This lack of traction is particularly significant because its 200-day moving average stands at $3,479. Have a look at the ETH chart below, or pull up a fresher version on StockCharts.com and you’ll quickly get why I’m so concerned.
Mainly, the 200 DMA — a commonly viewed gauge of longer-term market health — is acting as a resistance barrier to Ethereum. Therefore, unless ETH breaks above this demarcation line (which will probably be around $3,500 in a few sessions), the digital asset faces a potentially serious correction.
Of course, I understand that many view technical analysis as charting voodoo. My counterargument as it relates to Ethereum and cryptos in general is that we don’t really have any other metric to go by. Blockchain projects don’t have earnings or pay dividends in the traditional sense. So, if sentiment falls, then the underlying coin or token will fall.
You can’t have your cake and eat it, too.
Ethereum Faces One of Its Biggest Tests
An immediate counterargument to focusing on the 200 DMA is that Ethereum has dipped below this level before. In 2021, ETH made its first trip (ever so briefly) below this indicator in late June and then a lengthier trip in July.
To be fair, Ethereum and other cryptos hit rock bottom on July 20 before rebounding like Samuel L. Jackson’s favorite word: I’ll give you a hint, it’s not something I can repeat here or anywhere.
Anyways, the idea is that Ethereum has demonstrated a strong propensity to bounce back from troubling circumstances. Also, we shouldn’t ignore the many times ETH dipped below its 50 DMA but yet managed to come back stronger. With all that has transpired in cryptos, shouldn’t we give ETH the benefit of the doubt?
No, and that’s because of the gambler’s fallacy. In short, just because ETH bounced higher when it dipped below the 200 DMA doesn’t necessarily mean there’s a higher probability that it will do so again in the present juncture.
Mathematically, we’re talking about the law of small numbers or small sample sizes, in this case. Two out of two times is a perfect 100% rating but as you know, two doesn’t define a trend. You need a minimum third comparison point to make that case.
But I think outside fundamentals provide a stronger case for why you shouldn’t take the gambler’s fallacy on Ethereum. Back in 2021 — particularly in June and July — the Federal Reserve was heavily focused on gently guiding the recovery; as in, not too aggressively but not too passively.
But it was around November of last year when alarm bells really started ringing about inflation. Now, the Fed is signaling a decidedly hawkish monetary policy. That’s quite a change.
A New Ecosystem Altogether
One of the reasons why the gambler’s fallacy is so pernicious is that even if everything else is equal, the gambler’s state of mind is not. For instance, if she rolls a particular number five times in a row, she might decide to raise the stakes. But the act of raising the stakes may elevate her blood pressure, which in turn may cause physical changes that prevent her from repeating the prior five actions.
Nothing may appear to have changed yet putting more money at stake changed everything.
I fear that Ethereum is encountering a similar situation. Sure, it’s dipped below its 200 DMA multiple times now. But the circumstances in which that happened last year is now different this year. Maybe it might not change anything. Maybe it might change things for the better.
But given the weakness in other asset classes, I think you better be careful here.
On the date of publication, Josh Enomoto held a LONG position in ETH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.