What really caused Ethereum’s epic rally

Ethereum’s latest surge caught a lot of traders completely off guard. Billions of dollars in short positions were wiped out in just a couple of days, with some high-profile traders losing years of profits in seconds. But this wasn’t just a random short squeeze. It was the result of crowded bearish positioning, thin liquidity, and a fundamental story that many people had read backwards—right as a major regulatory proposal dropped in the US.

How big was Ethereum’s short squeeze?

Between 19–21 August, crypto markets saw one of the most brutal short squeezes in years. Around $3 billion in positions were liquidated in a single 24-hour window, with 48-hour totals reaching roughly $4 billion.

The key detail: the vast majority of that was shorts. Only about $300 million came from long positions, while more than $2.7 billion was from traders betting on lower prices. Over 90% of all liquidations were shorts, and Ethereum alone accounted for about $1.13 billion of that.

This made it the largest one-sided short liquidation event since November 2021. ETH ripped roughly 20% intraday at the peak of the move, compared to around 8% for Bitcoin.

Why Ethereum got hit harder than Bitcoin

To understand why ETH was at the center of the storm, you need to look at positioning and liquidity.

Heading into the move, Ethereum had:

• Heavily net-short open interest relative to Bitcoin, with perpetual futures funding rates hovering around neutral to negative across major exchanges.

• Less spot ETH on exchanges, as balances fell about 15% from early June to mid-August—from roughly 7.7 million ETH to about 6.54 million. That meant less resting supply available to absorb forced buying when shorts started to close.

• Market makers positioned net short above the $1,950–$2,000 area, creating a kind of liquidity vacuum once price pushed into that zone.

When the squeeze started, there simply wasn’t enough sell-side liquidity to meet the wave of short covering. That’s how you get vertical candles.

Big traders who got wiped out

Some of the losses were eye-watering. One trader on Hyperliquid, known as PensionUSDT, had built a 50,000 ETH short (around $16 million notional at 3x leverage) over two months, with an average entry near $1,700. They had a 23-trade win streak and roughly $49 million in lifetime profits from shorting crypto.

In 12 seconds, that position was gone. Around $24 million—roughly half of all the profits they had ever made—was wiped out in four liquidation tranches, with the last 1,417 ETH eaten by the exchange’s backstop fund.

They weren’t alone. One wallet had 1,800 BTC in short exposure liquidated for somewhere between $96–117 million. Another account reportedly lost over $70 million on 500 BTC. When positioning gets that crowded, the unwind is always brutal.

The bearish thesis on Ethereum: what shorts believed

So why were so many traders so confidently short ETH in the first place?

The dominant bearish thesis was simple: Ethereum’s main chain (Layer 1) was supposedly losing its economic engine. As more activity moved to Layer 2 (L2) rollups—cheaper networks built on top of Ethereum—base layer fees dropped. Lower fees meant less ETH being burned, which many interpreted as a sign that Ethereum’s long-term value capture was breaking down.

The ETH/BTC ratio seemed to support that story, hitting its weakest levels in about a year by late June. Ethereum’s L1 fee revenue was hovering around $330,000 a day—small for a network securing hundreds of billions of dollars in value.

On top of that, on-chain data showed that wallets holding 1,000+ ETH had reduced their holdings by about 1.7 million ETH since May 20. Bears saw this as a looming supply overhang that would cap any rally.

What the bears missed about Ethereum’s roadmap

The problem with that bearish view is that it treated lower L1 fees as a sign of weakness, when in reality they were a deliberate outcome of Ethereum’s scaling roadmap.

Recent upgrades were designed to make Ethereum cheaper and more scalable by pushing most user activity to L2s while keeping Ethereum as the secure settlement layer underneath.

Two key steps in that process were:

• EIP-4844, which made it cheaper for L2s to post their data back to Ethereum without clogging normal transactions.

• The Fusaka upgrade in December 2025, which introduced “pure data availability sampling” (DOS), allowing Ethereum to handle much more L2 data at once.

The result: transaction fees on major rollups now sit consistently below $0.02, a drop of more than 90–95% versus previous years. That’s not Ethereum dying—that’s Ethereum becoming usable at scale.

Meanwhile, smaller holders were quietly accumulating. Wallets with 1–10 ETH grew their share of the supply to about 4.52% over the same period that whales were trimming. Coins weren’t just being dumped; they were changing hands.

Glamsterdam: the next big Ethereum upgrade

The next major catalyst on the roadmap is a combined upgrade called “Glamsterdam” (Glowaz + Amsterdam). Core developers have described it as the biggest change to Ethereum since the Merge.

Glamsterdam aims to massively increase how much activity Ethereum can handle by:

• Raising the minimum gas limit per block to 200 million—more than triple current levels.

• Changing how transactions are ordered and how blocks are built so more of the process happens directly on Ethereum, instead of relying on external services.

The first public testnet for Glamsterdam launched between 18–20 August—right as shorts were getting blown out. The mainnet upgrade is currently targeted for Q4.

This upgrade, combined with already cheap L2 fees, strengthens Ethereum’s position as the settlement layer for a huge amount of on-chain activity.

Ethereum’s real strength: stablecoins, treasuries, and staking

While traders were fixated on daily L1 fees, the bigger picture for Ethereum has been quietly getting stronger.

Today, Ethereum and its L2 ecosystem host:

• Roughly half of all stablecoins. Around $165 billion of circulating stablecoin supply lives on Ethereum out of a global market of about $320 billion.

• Huge settlement volumes. Global stablecoin settlement hit a record $1.79 trillion in June, with Ethereum and its L2s handling more than $560 billion of that.

• Growing tokenized treasuries. Tokenized US Treasuries approached $16 billion by mid-year, led by Circle’s USYC (around $3 billion) and BlackRock’s BUIDL (roughly $2.64 billion).

• Significant institutional and treasury holdings. Over 10 million ETH now sits across institutional balance sheets, corporate treasuries, and exchange-traded products. One firm, Bitmine Immersion Technologies, reportedly holds about 4.8% of circulating supply.

• Locked supply via staking. Around 34% of all ETH—about 41.7 million coins—is staked and effectively removed from circulating supply.

Put together, that’s a powerful combination: growing real-world usage (payments, settlement, tokenized assets) and a shrinking liquid float due to staking and long-term holdings.

If you’re interested in how these macro shifts have affected Bitcoin as well, it’s worth looking at how BTC reacted during other major moves, such as in previous explosive Bitcoin rallies.

The SEC’s new proposal: a possible “ICO 2.0” moment

One day before the big ETH squeeze, the US Securities and Exchange Commission (SEC) proposed a sweeping new crypto rulebook under Chairman Paul Atkins’ “Project Crypto” initiative.

The 402-page proposal, approved unanimously by commissioners Paul Atkins, Hester Peirce, and Mark Uyeda, was officially published on 21 August. It kicked off a 60-day public comment period running until 20 October.

Three parts of the proposal are especially important:

• A startup exemption allowing projects to raise up to $5 million over four years, without limiting participation to accredited investors.

• A tiered fundraising system where projects can raise:

  • Up to $20 million over 12 months with lighter disclosure requirements.

  • Up to $75 million with audited accounts and regular updates.

• A safe harbor that could allow tokens to stop being treated as securities once the team’s promised work is either completed or abandoned.

This framework could reopen the door to large-scale token launches in the US—something we haven’t really seen since the 2017 ICO boom. Back then, projects raised billions on loose “utility token” claims, and regulators came after them later. Since then, most major launches have happened offshore.

If this proposal goes through in a workable form, we could see an “ICO 2.0” era—this time with clearer rules, fundraising caps, and structured disclosures. And where will a lot of that activity likely happen? On Ethereum, where the capital, stablecoins, and institutional infrastructure already live.

For a broader look at how regulatory shifts affect the wider market, you might also want to read our coverage of what major price swings mean for BTC, ETH, XRP, and altcoins.

ETFs, staking, and the evolving ETH investment vehicle

Spot crypto ETFs had a rough first half of the year, with about $5.4 billion in net outflows—the first negative half-year the category has ever seen. That weak backdrop helped fuel the bearish consensus on ETH.

But sentiment has started to turn:

• July saw around $365 million in net inflows into US spot ETH products, outpacing spot Bitcoin ETFs for the first time on a monthly basis.

• August delivered an eight-day inflow streak into ETH ETFs, the longest since October 2025.

• Total ETH ETF assets have climbed toward $14.3 billion, representing roughly 4.85% of Ethereum’s entire market cap.

The structure of these products is also evolving:

• BlackRock’s staked Ethereum Trust (ETHB) has been live since March, staking between 70–95% of its holdings and passing about 82% of staking rewards to investors. It has attracted over $600 million since launch.

• Fidelity filed an amendment on 11 August to give its FE product full staking capability.

In other words, more ETH is being locked into staking contracts and ETF-like vehicles at the same time that demand for those vehicles is growing. That’s a powerful supply-and-demand setup for any asset.

So, is Ethereum “back” or is this a dead cat bounce?

The traders who were short ETH going into this move weren’t working off fake numbers. L1 fee revenue really did fall. Competition from other chains is real. And ETF flows were negative for months.

The issue is that those concerns became over-priced into the market just as the fundamentals were quietly improving:

• Ethereum’s scaling roadmap is doing what it was designed to do: push activity to cheap L2s while keeping Ethereum as the secure settlement layer.

• Stablecoins, tokenized treasuries, and institutional ETH holdings are all growing.

• Staking and ETFs are locking up a large chunk of supply.

• A potentially friendlier US regulatory framework could bring a new wave of token launches and capital on-chain—much of it likely centered on Ethereum.

That’s why, when the market finally turned, it did so violently. Shorts weren’t just wrong on price; they were on the wrong side of a bigger structural shift.

From here, nothing is guaranteed. Macro shocks, regulatory surprises, or technical setbacks could still derail the trend. But if bullish momentum continues and the proposed rules and upgrades land as expected, Ethereum’s combination of shrinking liquid supply and expanding on-chain demand looks like one of the strongest setups in crypto.

Whether this marks the start of a sustained new leg higher or just a sharp bounce will depend on how those fundamentals and policies evolve over the coming months.