Ethereum hits a new all-time high: Why did the Fed ignite the fuse?

Source: Crypto Compound

Compiled by: Shaw Golden Finance

Ethereum has officially entered the price discovery phase. The second-largest cryptocurrency by market capitalization has surpassed the historical high of $4,885 set in 2021, briefly rising above $4,900 during the day, laying the groundwork for what could be a decisive chapter in this cycle. Unlike the price surges of many cryptocurrencies in the past, this breakthrough is not merely speculative—it is driven by changes in macroeconomic policy, institutional demand brought about by new exchange-traded funds (ETFs), strong on-chain fundamentals, and a shift in the psychological threshold for capital inflows into the market.

Let's analyze why this rebound is important, the driving factors behind it, and the risks that still exist in the future.

Macroeconomic Liquidity Tailwind

The market operates based on liquidity, and last week Jerome Powell's remarks were exactly what risk assets wanted to hear. During his speech at Jackson Hole, the Federal Reserve Chairman acknowledged the rising risks facing employment and hinted that interest rate cuts might come sooner than expected. This dovish tone was enough to drive yields lower, weaken the dollar, and boost the stock market—conditions that have historically ignited cryptocurrency bull markets.

Compared to Bitcoin, Ethereum's performance resembles that of a high beta liquidity asset. When the cost of funds is low, investors seek growth and cyclicality, not just safety. With Powell effectively opening the door for a rate cut in September, Ethereum finds itself in an excellent environment for breaking through its highs.

ETF Capital Inflow: A New Demand Engine

The most significant structural development in this cycle may be the launch of the Ethereum spot ETF. These investment tools provide institutional and traditional investors with a simple, regulated way to allocate funds without the need to interact with wallets or exchanges.

In just a few weeks, inflows have surged to billions of dollars, with daily additions exceeding hundreds of millions. The total assets under management have surpassed $12 billion, and currently, more than 6 million ETH are held in the ETF. These funds will not return to the exchanges in the short term—they are locked, thereby reducing the supply available for trading.

Earlier this year, the launch of the Bitcoin ETF triggered a similar demand surge. Now, Ethereum is experiencing its own structural buying pressure, and the market is responding to it.

Ethereum and Bitcoin: Rotational Trading

In this cycle, Bitcoin plays the role of digital gold - stable, conservative, and also the first stop for institutional investors trying out cryptocurrency. However, once liquidity turns positive, investors typically shift towards assets with higher liquidity.

This is exactly the case with Ethereum. ETH is regarded as the "leveraged Beta" of liquidity – it responds more to capital flows than BTC, is more closely connected to applications, and has stronger cyclicality. The ETH/BTC ratio has climbed to an annual high, which has once again sparked discussions about whether Ethereum's market capitalization can ultimately surpass that of Bitcoin.

Regardless of whether a reversal occurs, what is important is that investors believe Ethereum has more explosive potential in the current cycle stage.

Leverage and Liquidation

The original fluctuations in price trends are related not only to fundamentals but also to positions. Before the Jackson Hole meeting, the leverage across exchanges increased significantly. When Powell made dovish remarks, the price of ETH surged, forcing shorts to cover.

The result is: the amount liquidated exceeded 200 million dollars within a few hours, most of which was ETH. This short squeeze is reflexive—liquidations drive prices up, which in turn triggers more liquidations, creating a feedback loop. It amplifies market volatility in the short term but also clears weak positions, allowing the market to reset itself and return to a healthier trend.

On-chain fundamentals

Unlike certain periods in 2017 and even 2021, Ethereum's fundamentals today provide real support for its valuation. Several major trends stand out:

Layer 2 Growth: Networks like Arbitrum, Optimism, and Base process more transactions than Ethereum's base layer while paying ETH fees.

Total Value Locked: Decentralized Finance (DeFi) activities have rebounded strongly, with the Total Value Locked (TVL) climbing back above $60 billion.

Enterprise adoption: Upgrades such as Pectra can reduce costs by more than 90% and improve throughput, making ETH more suitable for practical use.

Supply Dynamics: Since the merge, Ethereum's issuance has shown a deflationary trend during peak usage periods. The higher the activity, the more ETH is burned, resulting in tighter supply during bullish market phases.

These fundamental elements construct a narrative that Ethereum (ETH) is not just a speculative token - it is a pillar of a constantly evolving financial system.

The Psychology of New Highs

The significance of breaking the historical high point goes far beyond clearing technical resistance levels - it also changes market psychology. In 2021, traders who bought near the top had to wait nearly four years to break even. Now that this upper limit has been broken, prices are no longer under pressure from supply above.

This opens the door for price discovery, during which the psychology of FOMO (fear of missing out) becomes a driving force. Momentum funds rush in, as models trigger at new all-time highs. Retail investors notice the headlines and seek participation opportunities. Even institutions that ignored cryptocurrencies just a year ago are now under pressure to explain why they haven't included ETH in their asset allocation.

In the market, psychological factors are often as important as mathematical factors. Currently, market sentiment has clearly turned bullish.

Global macro cross-influence

Ethereum does not trade in isolation - it fluctuates with the global market. In the coming weeks, three macro variables will be extremely important:

US Dollar: A weaker US dollar will boost ETH/USD. If the dollar rebounds significantly, cryptocurrency prices may correct.

Government bond yields: Yields below 4.2% will support risk assets. If yields rise back to 5%, there will be trouble.

Stock Market: The Nasdaq and S&P indices remain strong. If the stock market continues to rise, ETH may also increase.

Currently, these three forces tend to support. However, they can quickly shift, and cryptocurrencies can react immediately.

Upcoming risks

Every rebound comes with risks. Ethereum's breakout momentum is strong, but not unassailable. The main risks include:

Federal Reserve's hawkish stance: If inflation accelerates again, Powell may be forced to change the policy direction. This will quickly deplete liquidity.

ETF Weakness: Early capital inflows were strong, but it remains uncertain whether demand can continue. We have seen Bitcoin ETFs cool off initially, followed by a rebound.

Validator exit: Over 900,000 ETH are queued for withdrawal. If a large supply floods the market at the same time, price volatility may intensify.

Excessive leverage: After experiencing a significant squeeze, the funding rate and open interest may become overheated again, making ETH susceptible to a sharp pullback.

Recognizing these risks does not mean giving up a bullish perspective — rather, it is about maintaining a realistic attitude.

Analyst expectations

After Ethereum's breakthrough, several large institutions have raised their target prices. Some institutions believe that $5,000 is imminent. Other institutions expect that if ETFs continue to experience inflows and the Federal Reserve cuts interest rates, it will reach $7,500 by the end of the year. More aggressive predictions suggest it could reach $25,000 by 2028.

Skeptics warn that new highs often attract profit-taking by long-term holders. However, so far, demand has absorbed the selling pressure. The fact that Ethereum has been able to cleanly break through resistance levels indicates that this rally is not purely speculative—it is supported by structural capital flows.

What to watch next

Here are the key points to focus on in the coming weeks:

Support level: $4100 is the recent strong support level. Staying above this level can prolong the upward trend.

ETF fund inflow situation: Daily data will reveal whether institutional investors are still actively buying.

Macroeconomic data: The employment report, inflation conditions, and the upcoming Federal Reserve meeting in September will be crucial.

On-chain activities: Monitor L2 transaction volume, DeFi growth, and burn rate to gauge fundamental demand.

If all these factors remain consistent, Ethereum can not only maintain its breakout momentum but also potentially expand it to a new, higher range.

The historical high set by Ethereum is not just a number. It indicates that this asset has evolved into an important component of the financial system, influenced by macroeconomic factors, supported by institutions, and driven by fundamentals.

Powell's dovish stance provided the opportunity, ETFs provided the momentum, and Ethereum's own ecosystem endowed its architecture. Together, these three factors have created one of the most credible breakthroughs in the history of cryptocurrency.

This does not mean that the price will soar from here on out. Corrections will still occur, volatility will return, and risks still exist. But the current situation is very clear: Ethereum has not only kept pace with Bitcoin but has also led the market into the next phase of the cycle.

For traders, this means adapting to new trends. For investors, this means recognizing that the world's second-largest crypto asset has just proven it can break records in the right environment.

For the entire market, this means that the cycle has truly entered the next phase.