Conversion volumes of Ethereum (ETH) to USD have reached record-breaking levels. This is a result of a wave of large-scale liquidations in the decentralized finance (DeFi) sector. What has caused this surge in conversion activity is a combination of various factors. Firstly, it is related to market volatility and a rush to secure assets in more stable forms. Secondly, it is also a product of liquidity crises in several DeFi projects.
This increase in the volume of ETH to USD conversions is a reflection of stress within the DeFi ecosystem and it also raises an important question: How stable are the decentralized financial infrastructures when facing extreme market conditions?
The unprecedented surge in conversion volumes
As of late August 2024, the daily volume of ETH to USD conversions exceeded $20 billion, which is a new all-time high in the history of cryptocurrencies. Comparing this surge to previous months, it is clear that this surge is breaking all records. In previous months, daily conversion volumes have been somewhere between $5 to $8 billion. So, what is now causing this rise in conversions?
It is a direct product of a series of cascading liquidations in the DeFi market. This has been caused due to the forced closure of leveraged positions, which has led to investors choosing to convert their remaining assets into USD. It is a defensive move to protect assets. Furthermore, the ETH to USD conversion rate saw heightened activity on both cryptocurrency exchanges and trading platforms, including Crypto.com, which is a site that offers a user-friendly converter for Ethereum to the US dollar and other major cryptocurrencies. These platforms have played a big role for traders and investors who want to swiftly exchange their assets during market turbulence, which has also been the case with the current ETH conversion surge.
DeFi liquidations: A catalyst for record conversion
For years, the DeFi sector has been classified and praised as a revolutionary force in the financial world, due to all the possibilities and changes to the traditional banking system. However, the sector is currently grappling with a severe test in the past few weeks. With several major DeFi protocols having to be forced to liquidate substantial amounts of collateral, including popular lending and borrowing platforms, the sector is facing a huge challenge. What triggered these liquidations was an unexpectedly rapid decline in the price of Ethereum, which dropped over 30% in just a few days. This drop was a result of a series of macroeconomic events such as regulatory crackdowns and broader market selloffs.
However, the impact on DeFi projects has been substantial with many leveraged positions being automatically liquidated as their value of collateral plummeted. Traders had taken on these leveraged positions to maximize their returns, and the value of the collateral was largely composed of Ethereum. So, how does an automatic liquidation process look like? It involves selling off the collateral in an attempt to cover borrowed amounts, which will result in a sudden influx of ETH into the market. When facing these liquidations, large amounts of investors choose to convert their ETH holdings into USD, since this is the fastest and easiest way to preserve capital during market uncertainty.
The role of market conditions
Since the early days of DeFi, there have been inherent risks related to this space. However, the current market conditions are a reminder of just how volatile this space is. Furthermore, several factors have exacerbated the recent downturn. One such is the recent stance of the U.S. Federal Reserve, which has been addressing inflation by introducing more aggressive interest rates. The result has been a broad risk-off sentiment across global markets, and cryptocurrencies have been the major component of the sell-off.
Furthermore, regulatory scrutiny is once again in play. The cryptocurrency sector has always been surrounded by regulatory scrutiny, and this has once again impacted investors. Recently, the U.S. Securities and Exchange Commission (SEC) has taken action against some DeFi projects and their operators. This has increased the uncertainty, which has pushed for rushed conversions to ensure safety.
The impact on the price of Ethereum
As a result of the increased conversion volumes, the price of Ethereum has been impacted. The Ethereum price has gone down, and the selling pressure from liquidations and whale sell-offs are the reasons for this downward trend. This pushed the price of ETH below the $2,200 support level. Once this happened, an evil circle started, since the price drop led to further liquidations, and this feedback loop continues to exacerbate the market’s volatility.
However, it is not all bleak and negative. However, the fundamentals of Ethereum are strong and will remain strong for the long term. It is especially the Ethereum 2.0 upgrade and continued growth of the Ethereum ecosystem that makes some analysts stay positive in the midst of this challenge.
