After a lackluster April characterized by dwindling network activity and stagnant price movement, Ethereum (ETH), the second-largest cryptocurrency, finds itself at a potential turning point in May. Optimism is brewing among ETH holders, fueled by strengthening underlying fundamentals, the highly anticipated Pectra upgrade, and a renewed appetite from institutional investors through spot Ethereum exchange-traded funds (ETFs).

April presented a challenging landscape for the Ethereum network. On-chain data from Artemis revealed a noticeable dip in user engagement, evidenced by a decline in active addresses, daily transaction counts, and consequently, network fees and overall revenue. This slowdown, coupled with broader market inertia, kept Ethereum’s price tethered below crucial resistance levels, consistently failing to breach the $2,000 mark throughout the month.

However, Gabriel Halm, a research analyst at IntoTheBlock, offered a more hopeful perspective in a recent interview with BeInCrypto. Halm suggested that Ethereum possesses the potential to break through the $2,000 barrier in May and establish a more stable position above it. He pointed to a confluence of positive factors, including improved capital inflows into ETH spot ETFs, Ethereum’s dominant position within the decentralized finance (DeFi) ecosystem, and the upcoming Pectra upgrade, as potential catalysts for this upward movement.

Data from SosoValue highlights a significant shift in market sentiment regarding Ethereum ETFs. April witnessed net inflows totaling $66.25 million, a notable turnaround from the substantial $403.37 million in net outflows recorded in March. This reversal suggests a gradual return of investor confidence in the leading altcoin. It hints that institutional players might be strategically positioning themselves for a longer-term recovery, particularly as Ethereum’s network fundamentals begin to show signs of strengthening.

One key fundamental strength lies in Ethereum’s continued dominance of the DeFi sector. Currently, over 50% of the total value locked (TVL) in DeFi protocols resides on the Ethereum blockchain, according to data from DefiLlama. This firmly establishes Ethereum as the preferred settlement layer for a wide array of decentralized financial applications, encompassing lending, staking, yield farming, and decentralized exchanges. Consequently, any resurgence in capital inflows into Ethereum’s DeFi ecosystem in May, potentially spurred by improved broader market conditions, could translate into increased demand for ETH, thereby bolstering its price.

Adding to the optimistic outlook is the impending Pectra upgrade, slated for introduce on May 7, 2025. According to Gabriel Halm, this significant network enhancement has the potential to further bolster ETH’s price performance this month. The Pectra upgrade promises to deliver crucial improvements to the Ethereum network, including enhanced scalability, reduced transaction fees, improved security measures, and the introduction of smart account functionality. These upgrades could ignite a surge in user demand throughout May, potentially driving ETH’s price higher, assuming the broader macroeconomic environment remains supportive.

Despite these promising internal factors, Ethereum’s growth trajectory in May is not without its challenges, primarily stemming from broader economic pressures. Halm emphasized the significance of the upcoming Consumer Price Index (CPI) report scheduled for May 13th, stating that it “will be particularly important, potentially influencing market sentiment and contributing to this volatility.” Inflation data and any hawkish signals emanating from the Federal Reserve could reignite risk-off sentiment within the cryptocurrency market, placing downward pressure on Ethereum’s price.

Furthermore, Halm highlighted the persistent tight correlation between Ethereum’s price and the performance of US equities. Consequently, if equity markets experience renewed stress this month due to lingering inflation concerns or increased expectations of interest rate hikes, Ethereum is likely to face similar headwinds. Historical data from IntoTheBlock illustrates this strong correlation with the S&P 500.

“Looking ahead to May, if this high correlation persists, it implies that Ethereum’s vulnerability to market downturns and inflation-related pressures would likely be similar to that of traditional risk assets like those in the S&P 500. A downturn in the general market or increased concerns about inflation impacting equities could therefore negatively affect ETH’s price,” explained Gabriel Halm.

In conclusion, while Ethereum stands at the cusp of potentially significant fundamental improvements with the upcoming Pectra upgrade and is witnessing a resurgence in ETF inflows, its price trajectory in May remains heavily contingent on broader market stability. A sustained push above the $2,000 mark is possible, but any substantial rally will likely hinge on favorable inflation trends, positive risk sentiment in traditional financial markets, and the degree to which Ethereum can decouple from its tight correlation with equities. Investors and traders will be closely monitoring these macroeconomic indicators alongside the progress and impact of the Pectra upgrade in the weeks ahead.