How Low Can Ethereum Price Fall Against Bitcoin Amid DeFi Contagion?

Ethereum’s native token, Ether (ETH), has declined by more than 35% against Bitcoin (BTC) since December 2021, with the possibility of further decline in the coming months.

ETH/BTC weekly price chart. Source: TradingView

ETH/BTC dynamics

Bullish trends in the ETH/BTC pair generally suggest an increased risk appetite among crypto traders, where speculation is more focused on future Ether valuations than holding their long-term capital in BTC.

Conversely, an ETH/BTC bear cycle is usually accompanied by a drop in altcoins and a decline in Ethereum’s market share. As a result, traders are looking to BTC for safety, showing their risk-averse sentiment within the crypto industry.

Ethereum TVL Removal

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

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

Ethereum TVL performance since 2019. Source: DeFi Llama

Interestingly, ETH/BTC surged 345% to 0.08, a 2021 peak, in the same period given an increase in transaction demand on the Ethereum blockchain. However, the pair has since dropped 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, led by fears of contagion in the DeFi industry.

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

Bitcoin struggling but stronger than Ether

Bitcoin has faced minor 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 Ether’s 75% drop in the same period.

Also, unlike Ethereum, Bitcoin-focused hedge funds have seen inflows of $480 million so far this year, showing that BTC’s decline has done little to curb its demand among institutional investors.

Investment flows to/from crypto funds by assets. Source: CoinShares

ETH/BTC Downside Targets

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

Related: Swan Bitcoin CEO vs. Cryptocurrency Lenders: Users Far Undercompensated for Risk

From a technical perspective, the pair has been holding above a confluence of support defined by an ascending trendline, a Fibonacci retracement level at 0.048 BTC, and its 200-week EMA; the wave blue in the chart below) near 0.049 BTC.

ETH/BTC weekly price chart. Source: TradingView

On a bounce, ETH/BTC could test the 0.5 Fibonacci line near 0.062. Conversely, a decisive break below the confluence of support could mean a drop towards the 0.786-0.027 Fibonacci line in 2022, more than 50% below current price.

The ETH/BTC breakdown could coincide with a prolonged decline in the ETH/USD market, mainly due to the Fed’s quantitative tightening that has recently pushed crypto prices lower against the US dollar.

Conversely, weaker economic data could cause the Fed to cool off in its tightening spree. This could limit the downward 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 monetary policy approach needs to ease before crypto markets bottom out.”

But with Ethereum never regaining its all-time high against Bitcoin since June 2017 despite a strong adoption rate, the ETH/BTC pair could remain under pressure with the 0.027 target in the offing.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should do your own research when making a decision.