Ethereum (ETH) has experienced a significant downturn in the first half of May 2024, with its price dropping to $2,900 on May 11, marking a 9.8% weekly loss. Despite the global altcoin market seeing capital inflows of over $150 billion at the beginning of the month, bearish sentiment has since taken hold.

Notably, Ethereum's 9.8% price decline was steeper than the 6.9% drop in the overall altcoin market, as tracked by TradingView's TOTAL2 metric, which excludes Bitcoin.

Several factors contributed to Ethereum's underperformance, including negative sentiment surrounding delayed Ethereum ETF approvals in the United States. Although Hong Kong recently approved spot ETH ETFs for trading, the impact was minimal due to lower trading volumes compared to the US market. The situation worsened when Grayscale, a major digital assets manager, withdrew its Ethereum ETF application, casting further doubt on the likelihood of US regulatory approval in 2024.

Speculative Traders Turn Bearish on Ethereum

On-chain data indicates that speculative traders have responded negatively to recent developments, further exacerbating Ethereum's price decline. The Open Interest ratio, which measures the value of capital in ETH derivatives contracts relative to the spot market capitalization, has been decreasing since mid-April. 

Historically, Ethereum struggles to maintain prices above $3,000 when the Open Interest ratio falls below 0.2%. As of May 10, this ratio was at 0.18%, suggesting a lack of confidence among speculative traders.

This pessimistic outlook is partly due to the uncertainty surrounding the US SEC's decision on Ethereum ETFs. As a result, traders are hesitant to invest in new futures contracts, which has contributed to the downward pressure on ETH prices.

Key Support and Resistance Levels for Ethereum

As of May 10, Ethereum was trading at $2,910, close to the critical support level of $2,850. According to IntoTheBlock’s Global In/Out of the Money (GIOM) data, approximately 1.32 million active addresses had purchased 1.08 million ETH at an average price of $2,860. This buy-wall is expected to provide short-term support and potentially trigger a rebound if ETH dips below $2,900.

However, a significant sell-wall at $3,100 is likely to hinder any rapid price recovery. If Ethereum fails to hold above $2,850, it could face further declines, putting additional pressure on bullish traders to make covering purchases to prevent a deeper breakdown.

Long-term holders of Ethereum are maintaining their positions despite the recent price volatility. According to data from Glassnode, these holders are not selling en masse, even though many are in profit. This indicates a belief in better profit-taking opportunities in the future. However, short-term holders who have bought ETH within the last 155 days are at risk of falling into losses if the price drops further. The Market Value to Realized Value (MVRV) metric for these holders suggests that a fresh market drop could trigger panic selling.

JP Morgan analysts have expressed cautious optimism regarding the approval of spot Ethereum ETFs despite recent regulatory challenges. They noted that the SEC's approval of futures-based ETH ETFs might set a precedent for spot ETFs, though the market is not expecting immediate approval.

Impact of the Dencun Upgrade on Ethereum's Gas Fees

The recent Dencun upgrade has led to a significant reduction in Ethereum gas fees, reaching levels last seen in 2020. This has made on-chain operations like cross-chain bridging and NFT minting more affordable. 

However, the upgrade has also made Ethereum's network inflationary again by decreasing the amount of ETH burned during transactions. This shift challenges the narrative of Ethereum as "ultra-sound" money, which was predicated on its deflationary characteristics post-merge.

Despite these changes, Ethereum's long-term fundamentals, such as increasing monthly active users and declining gas fees, remain strong. The ETH/BTC ratio, however, continues to signal underperformance, suggesting that Ethereum might face further challenges in the near term.

Without any major bearish macro events on the horizon, Ethereum is expected to trade within the $2,852 to $3,000 range in the short term. The outcome of the SEC’s decision on VanEck’s spot ETH ETF application, expected later in May, could provide a critical trigger for market direction. Analysts suggest that the price might rebound or experience a significant surge if the ETFs are approved, while a denial could lead to further declines.