On balance, I’m supportive of Ethereum (CCC:ETH-USD) and many other benchmark cryptocurrencies. Though decentralized protocols have teething problems to overcome — like any other innovative platform — the concept of a largely self-intelligence transactional mechanism is groundbreaking.
Over time, mainstream commercial institutions can potentially leverage this technology to spark efficiencies in areas such as supply chain management and healthcare administration.
But then the above statement leads to an awkward question: if I’m so bullish on Ethereum and other cryptos, why have I demonstrated a tendency to be cautious if not outright skeptical toward the sector?
Admittedly, it would be strange if I held a stock and talked about all the reasons why you shouldn’t own it. However, the wildness of cryptos lends itself to occasionally strange circumstances.
Nevertheless, that’s not the primary reason why I tell it like it is for Ethereum. Rather, I prefer to be known as a realist more so than a proponent of cryptos or any other asset class.
I don’t necessarily think it’s outright contradictory to warn others of volatility risks in the digital asset space.
For instance, we’ve all seen those intervention-type reality shows, if only for brief moments—and stop typing, I know you know what I’m talking about! It’s just part of human nature.
In many if not most cases, the very reason why families set up interventions for their loved ones is precisely that — they love them and do not want them to hurt themselves any further. The biggest step toward addressing a problem is to admit that you have one.
But an even bigger step may be recognizing when someone else has a problem. And folks, we got a massive one with ETH.
Ethereum and the Erosion of Sentiment
As I’ve stated in prior InvestorPlace articles, one of the main criticisms I have about the crypto space is the frequent gaslighting involving what I call magic blockchain words.
People throw around terms like decentralization, hash functions and open-source sharding to bolster pseudo-intellectual talking points.
Now, we in the U.S. have free speech and all that jazz so folks can say what they want. However, I believe real harm exists when social influencers deliberately conflate complex terminology to support rather irresponsible guidance such as holding on for dear life (HODL) no matter what surrounding data implies.
With Ethereum, I think two seemingly contrasting concepts can exist in harmony: a) you can believe in the long-term potential of the Ethereum network and b) voice concerns about nearer-term rumblings.
Though the discipline of technical analysis is perhaps most cogent to the eye of the beholder, we can also objectively determine that at the time of writing, the price of Ethereum ($3,237) is below both its 200-day moving average ($3,438) and its 50 DMA ($3,960).
Thus, at minimum, we can factually ascertain that ETH’s upward trajectory hit a sizable wall.
Dazed and confused, the question now is whether Ethereum will get back up on its feet or if it needs a trip to the hospital. My belief is the latter. I see too much speculation has built into the crypto space and some flushing of toxins is required.
If the technical analysis isn’t convincing, Cointelegraph.com noted that the Ethereum futures market is in backwardation. A term usually associated with commodities or energy markets like oil, backwardation refers to the spot price being lower than the futures contract strike price.
You can research the granularity of backwardation, but the CliffsNotes version is that it has poor implications.
Supporting Evidence Points Down
If you didn’t find the backwardation argument convincing, then you might consider that outside factors also suggest Ethereum may be in trouble. Most notably, the Federal Reserve has signaled significant anxiety about sharply rising consumer prices. It may end up imposing an aggressively hawkish monetary policy, which wouldn’t incentive risk-on assets.
If even that argument fails to hold water, consider that quite a few people benefitted handsomely from their crypto wagers last year. Soon, those folks will pay Uncle Sam (if they know what’s good for them).
Last time I checked, the IRS only accepts payments in U.S. dollars. Thus, even more selling could be on the way.
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.