Ethereum had its worst month in over two years as a series of factors, from exchange-traded funds (ETFs) outflows to lack of mainnet activity, are conspiring to produce a very bearish bull market. ETH dropped 22% in August, the worst monthly performance since Terra’s implosion in June 2022, when the asset plummeted 45%. Meanwhile, Bitcoin dropped 8% in the same month, while the rest of the cryptocurrency market’s capitalization declined by 5% to $2.1 billion from $2.2 billion. This was supposed to be a great year for ETH. Analysts had predicted the fourth Bitcoin halving and ETF approvals, with the looming prospect of rate cuts, would all push ETH higher, Instead, the second-largest cryptocurrency is up a meager 7% this year. Sentiment especially soured last month as the ETF failed to drive institutional demand as expected, activity continues to flow through Ethereum Layer 2 networks, and to top it all off, the blockchain’s creator, Vitalik Buterin, said Decentralized Finance (DeFi) is unsustainable while the Ethereum Foundation sold ETH. Luke Nolan, research associate at CoinShares, believes the main contributors to the ETH’s decline are outflows from exchange-traded funds (ETFS). Investors have been draining money from Grayscale’s ETHE after the ETF approval to the tune of 50% of the fund. On-chain holdings sit at $4.4 billion from $8.6 billion. “I think the main elephant in the room is definitely Ethereum ETF flows,” said Luke Nolan, research associate at CoinShares. He told The Defiant that even though they started off “pretty decent,” with some issuers gathering a decent amount of assets, “the main story has been quite disappointing.” What’s astounding, Nolan pointed out, is that on Aug. 30, $0 flowed into Ethereum products, which ironically translated to the tenth best day since the instrument went live on July 23. “On a net basis, the ETFs have seen outflows of almost half a billion dollars since inception, which is pretty disappointing and has definitely dampened sentiment,” Nolan said. These numbers contrast to what happened with the launch of Bitcoin ETFs, which have seen surging interest from investors since they began trading on Jan. 11, 2024. More than 4.75% of Bitcoin's total 21 million supply sits in these funds, with more than $59 billion in value locked, according to a Dune dashboard. Parasitic L2s As ETH ETFs suffer outflows, Ethereum’s revenue – captured via fees to transact and execute computation – is down 99% in the past six months, according to TokenTerminal. A whopping near total drop in income could be due to a variety of factors, but one main concern is how Layer 2 scaling networks are draining volume, usage, and capital from the main chain. According to L2Beat, activity on Layer 2s like Arbitrum, Optimism, and Base, has been trending upwards and is now near a record. Value locked sits at $33 billion, which might be down from its $48 billion June peak, but is still three times higher than just a year ago. The big loser? Ethereum. Nolan called this “a momentary cannibalization” with the future bringing a distinctive split in segments. L1s will be for high value transactions such as institutional transactions and critical infrastructure demand, whereas L2s will become low value, but time sensitive. He highlighted mass-market applications and interoperability solutions. Idiosyncratic Factors Sentiment regarding Ethereum has continued to deteriorate on perceived slights and mis-steps from Ethereum Foundation leadership. The Ethereum Foundation caught flak after it sold about $100 million in ETH to pay for salaries and grants. Soon after, Ethereans were dismayed when Vitalik Buterin said he believes much of DeFi is unsustainable. Dragosch reckons these Ethereum-specific news are eroding sentiment and may be impacting price. U.S. Elections Surprisingly, the U.S. presidential race has had a significant impact on Ethereum. Matt Hougan, CIO at Bitwise, wrote on X on Aug. 27 that since Kamala Harris replaced sitting president Joe Biden as the Democratic party candidate, Ethereum dropped more than 26%. Meanwhile, Bitcoin has only fallen 8%. “Ethereum has more exposure to the election outcome than Bitcoin in my opinion,” Hougan said. That could be because institutions have already come to terms with Bitcoin’s spot as a store of value, while Ethereum has much stiffer competition in the smart contract environment, and the potential for regulatory enforcement from the SEC. Viktor Bunin, protocol specialist at Coinbase responded to Hougan’s numbers: “Because people build things on Ethereum and you can go after them for it.” Risk-Off Appetite The macro environment has also contributed to ETH’s underperformance, said Dessislava Ianeva, research analyst at onchain data research firm, Kaiko. “Deteriorating global risk sentiment in early August due to growth scares in the U.S. along with the unwinding of short-term yen carry trade positions,” has put pressure on ETH as investors sell riskier assets, said Dessislava Ianeva, research analyst at onchain data research firm, Kaiko. Hope Ahead Still, André Dragosch, European head of research at Bitwise, said the macro economic environment may soon turn favorable. “All of this could change with a reversal in risk appetite,” he told The Defiant. The trigger would need to be a “real interest rate cut” by the Federal Reserve, which in his perspective could flip the switch on Ethereum’s dismal performance. Also, investors should be patient and that seasonality is also playing its hand, Ianeva told The Defiant. “Q3 is historically a period of low volume and low volatility for risk assets,” she said, adding that, “the impact of spot ETH ETFs may take time to unfold,” and that ETFs are likely a net positive for ETH in the medium-to-long term. Meanwhile, Nolan says all eyes should be on Bitcoin. According to the analyst, if Bitcoin begins to perform well, potentially reaching all-time highs again, he would “be very surprised if ETH was not trading above $3,500 again.” That number is still a ways away from the asset’s all-time high, which patiently waits at $4,850.