Ethereum's Looming Supply Shock: How 40% of Circulating ETH Being at a Loss Signals Structural Weakness and a High-Risk Investment Landscape

Ethereum's recent performance has painted a grim picture for investors. By November 2025, over 40% of the circulating ETH supply was held at a loss, a stark reversal from earlier in the year when more than 75% of the supply was at a profit. This shift reflects a broader market reset, driven by macroeconomic uncertainty, regulatory pressures, and the collapse of speculative narratives. As Ethereum's price plummeted 21.46% in November alone to close at $3,028, the network's structural vulnerabilities have come into sharp focus. This article examines how on-chain losses, ETF outflows, and shifting retail capital flows are reshaping Ethereum's risk profile and signaling a critical inflection point for its long-term viability.

The 40% At-Loss Threshold: A Symptom of Systemic Stress

The 40% threshold is not merely a statistical anomaly but a barometer of systemic stress. According to a report by Yahoo Finance, Ethereum's on-chain data revealed that by December 2025, over 59% of the circulating supply was underwater. This acceleration in underwater positions underscores the growing fragility of retail and speculative investors, who are increasingly forced to sell or liquidate positions to mitigate losses. The decline in Ethereum's price has been exacerbated by macroeconomic factors, including concerns over Trump-era tariffs and the Federal Reserve's delayed rate cuts.

The implications of this threshold are profound. When a significant portion of a token's supply is held at a loss, it creates a self-reinforcing cycle of selling pressure. Investors who bought at higher prices are incentivized to offload ETH to avoid further losses, while new buyers face a psychological barrier to entry. This dynamic is particularly acute for Ethereum, which has historically relied on speculative demand to sustain its price.

ETF Outflows and Liquidation Dynamics: A Perfect Storm

Ethereum's struggles are compounded by structural weaknesses in its institutional and retail investor base. November 2025 saw a record $1.42 billion in net outflows from Ethereum spot ETFs, the largest monthly redemptions since these products launched. This outflow was part of a broader trend affecting the entire crypto market, with Bitcoin ETFs losing $3.48 billion in the same period. The exodus of institutional capital has been further amplified by forced liquidations. Data from Coinglass indicates that over 303,000 traders were liquidated within 24 hours during November's selloff, with Ethereum and Bitcoin accounting for a significant share of these losses.

The liquidation dynamics highlight Ethereum's vulnerability to leverage-driven volatility. As retail investors and leveraged positions unwind, the asset becomes increasingly susceptible to margin calls and cascading sell-offs. This is particularly concerning given Ethereum's role as a settlement layer for DeFi, where a $55 billion decline in Total Value Locked (TVL) has already been recorded. While the DeFi infrastructure itself has held up under pressure, the token's price performance has mirrored that of a volatile growth asset, lacking the stability required to sustain institutional adoption.

Retail Capital Reallocation: Altcoins vs. Ethereum

Retail investors have responded to the market turmoil by reallocating capital between altcoins and Ethereum, creating a complex web of risk and opportunity. In November 2025, altcoins like UNI, XRP, and DOGE surged by 77.6%, 8.9%, and 8.7%, respectively, as investors sought high-beta opportunities amid the broader selloff. This divergence in performance suggests a selective risk appetite, with retail traders favoring speculative altcoins over Ethereum and Bitcoin.

However, this reallocation is not without its risks. Ethereum's role as a critical infrastructure layer for DeFi has been overshadowed by its price volatility, leading to a bifurcation in its market role. While the network continues to process $115 billion in TVL, its token price has been battered by ETF outflows and macroeconomic headwinds. This duality raises questions about Ethereum's ability to maintain its dominance in the DeFi ecosystem, particularly as altcoins with more favorable supply dynamics and use cases gain traction.

Structural Risks and the Path Forward

The structural risks facing Ethereum are multifaceted. First, the network's supply growth rate has rebounded to +0.22% annually, effectively ending its narrative as a deflationary asset. This shift undermines one of Ethereum's core value propositions and could deter long-term investors seeking scarcity-driven price appreciation. Second, the permanently lost supply of ETH-estimated at 913,111 ETH as of late 2025-further complicates the supply-demand equation. While lost ETH can create deflationary pressure in theory, the current market conditions suggest that this effect is being outweighed by the outflows and liquidation dynamics.

For Ethereum to regain its footing, it must address these structural weaknesses while navigating the broader macroeconomic landscape. Regulatory clarity, particularly around the GENIUS Act's impact on stablecoin adoption, could provide a catalyst for growth. However, the path forward remains fraught with challenges, including the need to rebuild retail and institutional confidence, stabilize TVL in DeFi, and mitigate the risks of further ETF outflows.

Conclusion: A High-Risk Inflection Point

Ethereum's current trajectory is a cautionary tale for investors. The 40% at-loss threshold, coupled with ETF outflows, liquidation dynamics, and shifting retail capital flows, signals a critical inflection point. While the network's infrastructure remains robust, the token's price performance has exposed vulnerabilities that cannot be ignored. For Ethereum to thrive in the long term, it must navigate these structural risks while adapting to a rapidly evolving market. Investors, meanwhile, must weigh the potential rewards against the heightened risks of a market in flux.