Could Ethereum drop to $0? By The Motley Fool

© Reuters. Could Ethereum drop to $0?

(CRYPTO:ETH) has been in the spotlight for all the wrong reasons this year. Its major pullback was making headlines long before Monday’s crypto crash, which took it down to US$1,226. It would only take a few more days of this price action for ETH to break below US$1,000 – a key psychological milestone that Ether bulls are hoping not to break.

Unfortunately, the economic conditions leading to crypto weakness this year are not abating. Interest rates continue to rise and NFTs are still declining in popularity. The first of these factors affects crypto globally, while the second affects ETH specifically.

Undoubtedly, Ether is having an even harder time coming before finding a bottom. The question is whether it could drop all the way to $0. As we saw in 2018, cryptocurrency prices are inversely correlated to interest rates. Potentially, a really aggressive sequence of rate hikes could drive crypto prices very, very low. But is $0 for ETH a real possibility?

Why High Interest Rates Make Crypto Less Valuable The higher interest rates rise, the less valuable risky assets become. Technically, high interest rates reduce the value of all assets, but high-risk assets are the hardest hit. The cash flows of these assets are the most affected on a percentage basis by a higher discount rate.

The reasoning behind this is explained by discounted cash flow models: the higher the discount rate in the denominator, the less valuable the cash flow in the numerator. Unlike tech stocks, cryptocurrencies have no cash flow. They are risky, however, so the underlying logic still holds: it makes less sense to take on risk when the risk-free rate is higher.

NFTs Are Declining in Popularity So far, we’ve looked at one potential reason why the cryptocurrency is crashing this year. Next, we need to look at one factor that has a specific impact on ETH: the declining popularity of NFTs.

NFTs are a type of crypto asset that was popular in 2021. In 2022, their popularity has declined. According to Google (NASDAQ:) Trends for Search, their popularity is still declining to this day. This is a problem for ETH, as the token gained a lot from NFTs in the previous year. Many people have bought ETH for no other reason than to buy NFTs with it. If people stop buying NFTs, the demand for ETH goes down. We should therefore expect ETH to continue falling if NFTs do not somehow return to the scene.

Insane Takeaway: Maybe Not $0, But… As I have shown in this article, there are at least two reasons to expect ETH to show some weakness this year. I don’t think the token is going to $0. Ultimately, its usefulness in building apps gives hope that a demand-driving use case could emerge. But its price could be much lower than the bulls are hoping to see. There are simply too many different factors creating selling pressure right now.

Could Ethereum post go to $0? appeared first on The Motley Fool Canada.

Foolish contributor Andrew Button has no position on any of the stocks mentioned. The Motley Fool has positions in and recommends Ethereum.

This article first appeared on The Motley Fool

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