Ethereum Crashes 45% From $4,950 Peak: Why Layer 2s Are Killing ETH’s Value

Core Insights - Ethereum's mainnet is experiencing a significant decline in transaction fees and user activity as Layer 2 networks absorb most of the transactions, leading to a weakened economic value for ETH holders [1][6][8] - The price of ETH has dropped 45% from its peak of $4,950 in August to around $2,900 by early December, indicating a structural change in how Ethereum captures value [4][6][8] - Institutional interest in Ethereum is waning, with significant outflows from Ethereum ETFs and a shift of large investors towards Bitcoin and other high-speed alternative chains [11][12][21] Market Activity - Layer 2 networks are now handling the majority of Ethereum transactions, resulting in lower fees and reduced burn pressure on the mainnet [1][8][21] - The market has shown signs of losing momentum, with declining trading volumes and increased selling pressure during attempts to rally [2][3] - Ethereum's liquidity has thinned, trading spreads have widened, and retail traders are moving to faster networks, mirroring patterns seen in previous downcycles [13][21] Price Trends - ETH's price fell from around $4,950 in late August to approximately $2,900 by early December, marking a 45% decline over five months [4][6][8] - The sharpest decline occurred in mid-November when ETH dropped to about $2,700 before a slight recovery to around $3,000 by December 3 [3][4] Institutional Interest - Ethereum ETFs experienced $1.4 billion in outflows in November 2025, the largest monthly exit since their launch in July 2024, indicating a significant shift in institutional sentiment [11][7] - Large investors are reallocating capital to Bitcoin or faster alternative chains, reflecting a loss of confidence in Ethereum as a primary investment vehicle [12][21] Economic Value Capture - The migration to Layer 2 networks has resulted in sequencer revenue flowing to these rollups instead of ETH holders, diminishing the economic value captured by the mainnet [6][8][9] - The burn mechanism that previously created excitement around ETH is now weakened due to lower gas costs and reduced mainnet activity, leading to a mildly inflationary asset instead of a deflationary one [9][10] Future Outlook - Ethereum's recovery depends on pulling economic value back to the mainnet through potential changes in Layer 2 design, user behavior, and market conditions [15][24] - Possible scenarios for Ethereum's future include a bullish rally if revenue-sharing proposals are adopted, a stable range between $2,500 and $2,800, or a bearish scenario with a drop below $2,400 [25][28][30]