Ethereum Supply Slowed after ‘the Merge,’ Will It Drive Investment Narrative?

According to data from Ethereum tracker Ultrasound Money, the latest upgrade on Ethereum (the Merge) is lowering the supply of Ether (ETH) in the proof-of-stake consensus.

The second larger cryptocurrency, however, may still have a long way to go before becoming deflationary.

Some of the key promises that the upgrade pledged to do for the Ethereum blockchain were to improve efficiency and make the network more scalable, lower the supply of Ether, thus making it a deflationary asset, and others.

Metrics from the web portal Ultrasound Money show that the supply of Ether under the proof-of-stake network has increased by more than 5,990 from the Merge event till now. But this number is lower than it could have been under the proof-of-work consensus mechanism, the data shows.

Besides that, the number is much lower than the supply of Bitcoin whose network produces 6.25 BTC coins every ten minutes running on the proof-of-work mechanism.

According to the Ultrasound Money platform, Ether can become deflationary when the coins from block subsidy are lower than the ones being burned. Furthermore, ETH will become a deflationary asset when the number of people who transact with the coin grows higher than those who stake it.

Apart from that, the cryptocurrency will be deflationary when the transaction fee reaches 15 Gwei or 0.000000015ETH.

But for now, these conditions do not exist yet. As per Ultrasound Money, Ethereum transaction fees stand at 11 Gwei, and staking generates more tokens than burned ones.

What Is Being Seen on The Ground So Far?

On September 15, Ethereum switched from using energy-intensive technology (the proof-of-work network) to a more sustainable system (the proof-of-stake consensus) in a major update called “the merge.” The upgrade is reported to have reduced the network’s power consumption by more than 99.95%.

PoS is an alternative that consumes less energy. Instead of consuming electricity, which fuels computing power, users who want to be part of the verification process put their personal cryptocurrency on the line in a process popularly known as staking.

These users, called validators, are randomly selected to verify new information to be added to a block. They receive cryptocurrency if they confirm accurate information. If they act dishonestly, they stand to lose their stake.

While it is impossible to know exactly how the merge will play out in the long term, for now, investors are rushing to pour their funds into staking. This confirms the above narrative that Ether still has a long way to become deflationary.

Over the past week, Ether staked in the Ethereum blockchain reached almost $195 million. Under the new system, stakers contribute to the security of Ethereum by locking their ETH in exchange for a modest annual return (APR).

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Ethereum eyes $3.5K as ETH price reclaims pandemic-era support with 40% rebound

Ethereum’s native token Ether (ETH) looks poised to hit $3,500 in the coming sessions as it reclaimed a historically strong support level on Feb. 5.

Ethereum price back above key trendline

ETH price rising above its 50-week exponential moving average (50-week EMA; the red wave in the chart below) means the price also inched above $3,000, a psychological support level that may serve as the ground for Ether’s next leg up.

ETH/USD weekly price chart. Source: TradingView

The 50-week EMA was instrumental in maintaining Ether’s bullish bias across 2020 and 2021. For instance, it served as a strong accumulation zone during the market correction in the second and third quarters last year, pushing ETH price from around $1,700 to as high as $4,951 (data from Binance).

As a result, reclaiming the 50-week EMA as support has opened up the possibility of additional upside moves toward the next resistance target near the 20-week EMA (the green wave in the chart above), which comes to be around $3,500.

Meanwhile, a decisive break above $3,500 could have ETH/USD test a horizontal resistance trendline that constitutes an ascending triangle pattern. Such a move would put the Ethereum token en route to its previous record high near $5,000. 

ETH/USD weekly price chart. Source: TradingView

Jobs report could play spoilers

The latest buying in the Ethereum market appeared as strong earnings from Inc. boosted investors’ confidence in riskier assets, including technology stocks and Bitcoin (BTC).

ETH/USD versus Nasdaq Composite weekly price chart. Source: TradingView

Ether rallied by more than 11% after the earnings release on Friday. The price jump also boosted its week-to-date profits higher to nearly 16%, its best week since August 2021.

However, the rally appeared in conflict with the latest nonfarm payroll (NFP) data, also released on Friday. Despite fears that Omicron would curtail business activity, the U.S. companies added 467,000 jobs in Jan. 2022, beating market expectations by a wide margin.

U.S. nonfarm payroll data. Source: Bureau of Labor Statistics, Bloomberg

The NFP report underscored how difficult it is for the Federal Reserve to forecast interim changes in the economy. Nonetheless, it also ensured that the U.S. central bank would go ahead with its plans to raise short-term benchmark rates at its March 15-16 meeting.

In a press conference last month, Fed chair Jerome Powell said they would continue raising interest rates after the March hike, faster than they did during the past decade if the labor market looks stronger and inflation remains above their 2% target.

Related: US Federal Reserve is making some analysts bullish on Bitcoin again

The news prompted a selloff across riskier assets, with data showing that cryptocurrency investment products processed outflows worth $61 million every week in January 2022.

“It’s important to note that there’s still significant investor demand for digital asset investment products, but institutions seemingly reacted to the Fed by offloading their positions,” noted Michael Sonnenshein, chief executive of Grayscale Investments.

Crypto investment vehicles performance in Jan. 2022. Source: CryptoCompare, FT

The pullback scenario

The bearish scenario with the price below the 50-week EMA could have ETH test its ascending channel’s lower trendline near $2,500 as support. Meanwhile, a decisive close below the trendline would bring Ether’s Fibonacci retracement levels closer, as shown in the chart below.

ETH/USD weekly price chart featuring Fib retracement levels. Source: TradingView

If the bearish scenario unfolds, the possibility of the ETH/USD pair dropping below $2,000 cannot be ruled out.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.