Crypto Quill

Ethereum, the second-largest cryptocurrency by market capitalization, has been burning more tokens than it has been issuing, creating a deflationary pressure on its supply. This phenomenon, which started after the London hard fork in August 2023, has intensified in the past month, with over $13 million worth of ETH being destroyed. How does this affect the price and the future of Ethereum? Let’s find out.

The Burning Mechanism and Its Impact on Supply

The London hard fork introduced a major change to Ethereum’s fee structure, known as EIP-1559. This proposal replaced the previous auction-based system, where users had to bid for their transactions to be included in a block, with a base fee that adjusts according to the network congestion. The base fee is then burned, meaning that it is sent to a special address that cannot be accessed by anyone. This reduces the amount of ETH in circulation, creating a deflationary effect.

According to Etherchain, a website that tracks the Ethereum network statistics, the network has burned 74,933.24 ETH in the past 30 days, worth roughly $13 million at the current price. In the same period, the network has issued 69,313.86 ETH as block rewards and uncle rewards, resulting in a net supply change of -5,619.39 ETH. This means that the supply of ETH has decreased by more than 5,000 tokens in a month, making Ethereum a deflationary asset.

A deflationary asset is one that has a decreasing supply over time, implying that the demand is always higher than the supply, leading to an increase in value per unit. This is in contrast to an inflationary asset, which has an increasing supply over time, diluting its value per unit. Bitcoin, for example, is designed to be a deflationary asset, as it has a fixed supply of 21 million coins that will ever be created. Ethereum, on the other hand, does not have a hard cap on its supply, but its issuance rate is expected to decrease over time, especially after the transition to proof-of-stake, which will reduce the block rewards significantly.

The Bullish Case for Ethereum

The deflationary pressure on Ethereum’s supply is not the only factor that could drive its price higher in the near future. There are several other developments that could boost the demand and the utility of the network, creating a bullish scenario for ETH.

One of these is the upcoming Dencun upgrade, which is expected to be deployed on the mainnet in March 2024. This upgrade will introduce several improvements to the network, such as reducing the gas cost of some operations, increasing the security of the protocol, and enabling new features such as account abstraction and state expiry. The Dencun upgrade is also a prerequisite for the merge, which will mark the final phase of Ethereum’s transition from proof-of-work to proof-of-stake, eliminating the need for energy-intensive mining and enhancing the scalability and sustainability of the network.

Another factor that could increase the demand for ETH is the potential approval of an Ethereum spot ETF in the US. A spot ETF is a fund that tracks the price of an underlying asset, such as ETH, and allows investors to buy and sell shares of the fund on a regulated exchange, without having to deal with the technicalities of owning and storing the asset. A spot ETF could attract more institutional and retail investors to the Ethereum market, increasing its liquidity and exposure. Several companies have filed applications for an Ethereum spot ETF with the US Securities and Exchange Commission (SEC), but none have been approved yet. However, some experts believe that the SEC could greenlight an Ethereum spot ETF in May 2024, when the deadline for some applicants hits.

Additionally, there is renewed optimism in the crypto market based on the Bitcoin halving, which is scheduled for April 2024. The Bitcoin halving is an event that occurs every four years, when the block reward for miners is cut in half, reducing the supply of new bitcoins entering the market. Historically, the Bitcoin halving has been one of the most bullish events for the crypto market, as it creates a supply shock that drives the price higher. The Bitcoin halving also affects other cryptocurrencies, such as Ethereum, as they tend to follow the trend of the leading coin. Some analysts predict that Bitcoin could reach a new all-time high of over $100,000 by the end of 2024, with a similar rally expected for Ethereum as well.

Ethereum has entered a deflationary phase, burning more tokens than it has been issuing, reducing its supply and increasing its scarcity. This phenomenon, coupled with the upcoming network upgrades, the potential approval of an Ethereum spot ETF, and the Bitcoin halving, could create a perfect storm for ETH to soar to new heights in 2024.