Ethereum Plunges Below $1,900: DeFi Sector Under Pressure as Major Liquidation Risk Looms

Ethereum (ETH) is currently trading around $1,850, representing a significant decline of nearly 10% over the past 24 hours. This sharp downward movement has sent shockwaves through the cryptocurrency ecosystem, particularly in the decentralized finance (DeFi) sector where Ethereum ETH/USD serves as critical collateral for billions in loans.

DeFi Loans in Danger as Liquidation Thresholds Approach

Currently dangerously close to collapse is a huge DeFi loan on Sky (previously Maker) platform supported by around $130 million worth of ETH. After borrowing $74 million in DAI stablecoins using 65,680 ETH as security, the borrower has been compelled to act defensively after ETH’s price fell below the $1,900 key liquidation level.

Blockchain records show the borrower’s frantic attempt to keep their position, pulling 2,000 ETH (almost $4 million) from Bitfinex and depositing it to their Sky vault. Prices kept declining, so lowering their risk by withdrawing $1.6 million USDT from Binance, changing it to DAI, and then using those proceeds to pay down their outstanding debt to $73.1 million.

With a new liquidation threshold of $1,836 – dangerously near to ETH’s current trading range around $1,870, the position remains in danger notwithstanding these emergency actions.

Broader Market Risk: $366 million in Potential Liquidations

The dilemma goes much beyond this one sizable space. DefiLlama figures show that should ETH drop to $1,857, around $13.6 million worth of DeFi loans face liquidation; another $117 million at jeopardy should prices drop to $1,780. A further 20% drop in ETH’s price overall might kick off liquidations of assets valued $366 million.

These possible liquidations create a worrying feedback loop: as DeFi protocols auction off collateral from liquidated holdings, selling pressure on ETH rises, possibly driving prices down and so triggering even more liquidations.

Institutional Interest in ETH Wanes

Further complicating ETH’s situation is declining institutional demand shown by spot ETF outflows of $406 million during recent trading days. Given ETH’s current inflationary state (0.7% annual supply increase) and relatively low staking yields (below 2.5%) compared to stablecoin yields in DeFi (up to 4.5%), this catalyst appears less promising even if some analysts had predicted that ultimate approval of native staking for Ethereum ETFs might boost demand.

The possibility of a future Solana ETF license in 2025 complicates Ethereum’s institutional perspective even more since it would generate direct rivalry for investment flows.

ETH/USD Technical Analysis: Is This the Bottom?

ETH/USD

Despite the bearish price action, several on-chain metrics suggest a potential bottoming pattern may be forming:

Exchange Outflows Surge

Data from both IntoTheBlock and CryptoQuant shows significant ETH outflows from exchanges, totaling approximately $1.8 billion in the past week – the highest since December 2022. These outflows suggest that despite market pessimism, many investors view current price levels as a strategic buying opportunity.

MVRV Ratio Signals Undervaluation

Ethereum’s Market Value to Realized Value (MVRV) ratio has dropped to 0.8 for the first time since October 2023. Historically, an MVRV ratio below 1 indicates undervaluation and has preceded price rebounds. The last time the metric reached these levels (October 18, 2023), ETH found a local bottom near $1,600 before beginning its 2024 bull run.

Chart Patterns Suggest Potential Reversal

Technical analyst Mikybull has identified a diamond price pattern forming on ETH’s 4-hour chart, which typically signals a bullish reversal after a downtrend. If this pattern plays out, ETH could potentially rebound by approximately 20% to $2,600 from current levels.

However, ETH’s weekly chart closed below the 200-day EMA for the first time since October 2023 – a concerning development since the token has historically spent less than 15% of its time below this indicator since 2020. For bullish momentum to return, ETH needs to reclaim this critical technical level in the coming days.

Four Fundamental Elements for ETH Recovery

Market analysts pinpoint four main requirements for Ethereum to restore its positive momentum and drive above $2,500:

• Successful Network Upgrades: The upcoming Pectra upgrade must deliver meaningful improvements to transaction fees and usability without delays or technical issues.
• Increased Network Usage: Higher demand for block space would reinvigorate Ethereum’s burn-fee mechanism, potentially returning ETH to a deflationary state.
• Enhanced Layer-2 Interoperability: Ethereum needs to address liquidity fragmentation across its ecosystem by improving connections between its various scaling solutions.
• Clearer Competitive Advantages: With rising competition from blockchains like Solana and newer entrants like Berachain and Hyperliquid, Ethereum must demonstrate tangible benefits that justify its first-mover position.

Ethereum Price Analysis

The next few weeks will probably define whether present price levels offer a buying opportunity or the start of a more protracted drop as Ethereum negotiates this turning point. Although technical signals show some promise for bulls, Ethereum’s road to recovery relies on real changes in network utility, competitive posture, and institutional acceptance.

All eyes are currently focused on the $1,800-$1,900 range, which could be crucial for ETH’s short-term path as well as the stability of the larger DeFi ecosystem.

Arslan Butt

Index & Commodity Analyst

Arslan Butt serves as the Lead Commodities and Indices Analyst, bringing a wealth of expertise to the field. With an MBA in Behavioral Finance and active progress towards a Ph.D., Arslan possesses a deep understanding of market dynamics.His professional journey includes a significant role as a senior analyst at a leading brokerage firm, complementing his extensive experience as a market analyst and day trader. Adept in educating others, Arslan has a commendable track record as an instructor and public speaker.His incisive analyses, particularly within the realms of cryptocurrency and forex markets, are showcased across esteemed financial publications such as ForexCrunch, InsideBitcoins, and EconomyWatch, solidifying his reputation in the financial community.