Ethereum Market Shows Signs Of Overheating, Decline Soon?

On-chain data shows the Ethereum failed transaction count has shot up recently, a sign that the ETH market may be overheating right now.

Ethereum Network Is Observing A Surge In Transactions Currently

As pointed out by an analyst in a CryptoQuant post, whenever the failed transaction count of the coin breaks the 200,000 mark, it’s usually a hint of overheating in the market.

In periods where the activity of the Ethereum blockchain is high, that is, a large number of transactions are taking place simultaneously, the gas fees on the network can sharply go up.

This happens because the network can only handle so many transfers at once, so the gas price has to go up if there is too much demand to confirm moves on the blockchain.

During such periods of high gas prices, if investors attach a low amount of gas with their transactions, the transfer can end up failing if the fees happen to be lower than what the network requires at that specific moment.

The “failed transaction count” is an indicator that measures the total number of such Ethereum transfers that fail to go through. As the appearance of failed transactions can have a direct relationship with the demand that the network is observing right now, this indicator’s value can provide insight into the activity on the blockchain.

Now, here is a chart that shows the trend in the Ethereum failed transaction count over the last few years:

The value of the metric seems to have been been pretty high in recent days | Source: CryptoQuant

As shown in the above graph, the quant has marked a threshold line for the Ethereum failed transaction count. This level corresponds to 200,000 failed transactions taking place on the blockchain, meaning that crosses above this line generally suggest that a high amount of activity is occurring on the network.

In the last few years, whenever the indicator has surged above this mark, the price of the asset has usually reacted by showing some volatility. This makes sense, as a large number of transactions can provide the fuel for sharp moves in the price to take place.

Naturally, such an overheated market can see the price go in either direction, meaning that both increases, as well as declines in the asset, are possible with this volatility.

From the chart, however, it’s visible that a majority of the instances where the failed transaction count has exceeded 200,000 have been followed by the price registering a plunge.

In the last few days, this indicator has once again surged up, suggesting that the blockchain’s activity is high right now. The average gas limit on the network (the maximum amount of gas that the average user is opting for) has also sharply risen recently, providing further evidence of the market being overheated.

The metric's value has gone up recently | Source: CryptoQuant

The latest surge in the interest surrounding meme coins as Pepe Coin (PEPE) has burst onto the scene can be one of the factors behind this high blockchain activity.

This overheated market can lead to the price going either way, but considering the pattern seen during most of the previous instances, a decline might just be the more probable direction.

ETH Price

At the time of writing, Ethereum is trading around $1,800, down 5% in the last week.

The value of ETH seems to have been moving sideways in the last couple of days | Source: ETHUSD on TradingView

Featured image from Kanchanara on Unsplash.com, charts from TradingView.com, CryptoQuant.com