On-chain data shows that the number of failed transactions on Ethereum has increased recently, a sign that the ETH market may be overheating at the moment.
The Ethereum network is currently seeing a spike in transactions
As one analyst at CryptoQuant pointed out: mailWhen the number of failed transactions for a coin breaks the 200,000 mark, it is usually a signal that the market is overheating.
During periods when the activity of the Ethereum blockchain is high, that is, a large number of transactions are taking place at the same time, gas fees on the network can skyrocket.
This happens because the network can only handle so many transfers at once, so the price of gas has to go up if there is too much demand to confirm the moves on the blockchain.
During these periods of high gas prices, if investors attach a small amount of gas to their transactions, it can end up failing if the fee is less than what the network is demanding at that particular moment.
The Failed Transaction Count is an indicator that measures the total number of Ethereum transfers that are not executed. Since the appearance of failed transactions can have a direct relationship to the demand that the network is currently monitoring, the value of this indicator can provide insight into the activity on the blockchain.
Now, here is a chart showing the trend in the number of failed transactions on Ethereum over the past few years:
The value of the metric seems to have been been pretty high in recent days | Source: CryptoQuant
As shown in the chart above, Quantum has set a threshold line for the number of failed transactions on Ethereum. This level corresponds to 200,000 failed transactions occurring on the blockchain, which means that a cross above this line generally indicates that a significant amount of activity has occurred on the network.
In the past few years, whenever the indicator has risen 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 fuel for sharp price movements.
Of course, such a frantic market can see the price move in any direction, which means that both increases, as well as decreases in the asset, are possible with this volatility.
However, from the chart, it is evident that the majority of cases where the number of failed transactions exceeded 200,000 was followed by the price registering a downside.
In the past few days, this indicator has risen again, indicating that the blockchain activity is currently high. The average gas limit on the grid (the maximum amount of gas chosen by the average user) has also risen sharply recently, providing further evidence of the overheating of the market.
The metric's value has gone up recently | Source: CryptoQuant
The recent surge in interest surrounding meme coins such as Pepe Coin (PEPE) could be one of the factors behind this high activity of the blockchain.
This frantic market could move the price in either direction, but given the pattern seen during most of the previous instances, a drop might be the more likely direction.
ETH price
At the time of writing, Ethereum is trading around $1,800, down 5% in the past week.
The value of ETH seems to have been moving sideways in the last couple of days | Source: ETHUSD on TradingView
Featured image by Kanchanara on Unsplash.com, charts from TradingView.com, CryptoQuant.com