$ETH On a Bearish Trend, Long-Term Prospects Unclear: Are Layer-2s to Blame?

• Ethereum ($ETH) has experienced a 3.23% 24-hour decline, trading below its 100-day simple moving average (SMA) and key support levels.
• Technical indicators are mixed, suggesting either a correction or consolidation in the short term. The long-term direction remains unclear.
• Ethereum's reliance on Layer-2 (L2) solutions contributed to $ETH's inflation.

CryptoQuant analyst Burak Kesmeci revealed the amount of $ETH held in accumulation addresses has risen from 11.5M in January to 19M. Compared to last year, it has doubled.

While that's a bullish sign, $ETH performance hasn't been so promising recently. A 3.23% 24-hour dip dragged it down to $2,634. The monthly increase of 1.84% is negligible as $ETH still stands 35% below its yearly high of $4,066.

Why is $ETH struggling to rebound to its former high, and should we expect another downturn? Let's take a closer look at technical indicators and ecosystem updates.

Technical Indicators Paint a Grim Picture

A failure to break above the $2,760 resistance level on Monday caused $ETH to drop to $2,634. The last time it was trading at this price was in August.

The current price is below $ETH's 100-day SMA of $2,682.7, which suggests that $ETH stepped on the path of correction - at least in the short term.

Another bearish indicator is a break below the $2,680 support lineon the hourly $ETH/USD chart.

Currently, the price has consolidated near the 23.6% Fibonacci retracement level. Essentially, this means $ETH's downward movement has paused and can either reverse or continue falling.

Neutral oscillators further highlight $ETH's indecisiveness. Given the mixed SMAs and a flat Ichimoku Cloud, the long-term direction is equally unclear.

$ETH must clear the new $2,680 resistance zone in the upcoming days to prevent further decline. If it fails, it could find initial support around $2,625.

Are Layer-2s at Fault?Technical analysis is a valuable tool, but real life isn't as clear-cut. Fundamental factors like ecosystem updates and security concerns also influence $ETH's price direction.

$ETH experienced multiple moderate drops throughout the year and tanked in July following the approval of $ETH ETFs. Subpar performance of $ETH ETFs compared to similar $BTC products may be to blame.

Besides, Ethereum heavily relies on L2 solutions for scaling. Despite achieving the key objective, the rise of L2s negatively affected $ETH's burn mechanism.

$ETH was meant to be deflationary by design. But what happens when you offload transactions to L2s like Arbitrum and Optimism? Users get lower gas fees, which means fewer tokens are burnt with each transaction. The result? $ETH became inflationary.

Possibly owing to this, Buterin said he'd now only acknowledge mature L2s and not glorified multisigs.'

This unexpected side effect has been $ETH's biggest hurdle for years. As for yesterday's dip, it may have to do with Buterin's warning about potential network centralization.

Closing Remarks

While $ETH has seen an increase in its accumulation addresses, its price performance is concerning.

Inflation triggered by reliance on L2s appears to be the main cause of $ETH's downward trend. Unless Ethereum resolves this issue, its price is likely to remain stagnant.

References

• Ethereum (TradingView)
• Ethereum (CoinMarketCap)
• The total amount of Ethereum in accumulation addresses surpassed 19 million (CryptoQuant)

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