Ethereum’s Supply And Demand Dynamics Suggest Potential Surge

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The approval of 11 spot Bitcoin exchange-traded funds (ETF) by the U.S. Securities and Exchange Commission back in January and the rise above the $50K threshold, marking a two-year high, have kept Bitcoin in the spotlight for the past few months. By comparison, its main competitor Ethereum has had a less stellar performance and hasn’t garnered as much attention lately. The price gap between the two top coins is another factor overshadowing Ethereum’s presence in the crypto market.

However, just because the altcoin leader has been getting less media coverage than the crypto king shouldn’t undermine its importance or potential. Ethereum supporters as well as those looking to buy Ethereum with bank transfer or via other methods and add it to their investment portfolio will be happy to know there are several signs indicating that the top altcoin could be the start of the next bull run, and it might even outshine Bitcoin in the following months.

The Future Is Looking Bright for Ethereum

The rising crypto tide at the beginning of the year lifted all boats but some are sailing higher than others. Bitcoin’s ship recently cruised past the $50K mark, while Ethereum managed to hit a 21-month high of $2,700 shortly after the SEC gave the green light to the first spot Bitcoin ETFs, but has been performing modestly ever since. These events paint Bitcoin as the big winner but if we dig a little deeper, recent data reveals that Ethereum is poised for a comeback.

Changes in Ethereum’s supply and demand dynamics point towards a potential surge in the near future. According to BeInCrypto, Ethereum staking has reached a major milestone, with over 25% of the total Ethereum supply, worth almost $75 billion, currently kept in staking contracts. As a result, there is less ETH accessible on exchanges for users to invest in or trade.

In 2022, Ethereum switched from the proof-of-work (PoW) consensus mechanism, which was criticized for being energy-intensive, to a more sustainable alternative in the form of a proof-of-stake (PoS) protocol. This requires users to stake their coins, meaning they have to lock them up in a specific blockchain address for a certain period of time, in order to keep the network safe and running and earn rewards. The final phase of the upgrade was completed last year, allowing users to withdraw their staked tokens and since then the staking activity on the network has increased considerably.

Apart from the record rate of staking participation, it’s important to note that ETH's annual supply change is -0.21%. This might look like a very small percentage but it means that the number of coins being burned surpasses the number of coins that are being minted, resulting in a constant supply decrease. Following the Merge, the Ethereum supply dropped by almost 357,100. As of this writing, the value of the lost supply amounts to $947 million.

The crypto space is also filled with anticipation and speculation over the potential launch of a spot Ethereum ETF this year. The approval of spot Bitcoin ETFs gives hope that spot Ethereum ETFs might also get a positive response from the SEC, with many analysts expecting the approval to come as early as May. Spot Bitcoin ETFs had a significant impact on the Bitcoin supply, managing to accumulate staggering amounts of BTC in a very short period. If expert predictions come true and spot Ethereum ETFs behave in a similar manner, then the Ethereum supply will drop even further.

Then there are the upcoming upgrades that the Ethereum network has scheduled, particularly the Dencun (EIP-4844) which is going to be rolled out in March, aiming to enhance data storage, improve transaction efficiency and reduce gas fees. All these improvements will increase Ethereum’s appeal and possibly attract more users to the network.

According to one of the most fundamental principles in economics, the relationship between supply and demand determines the prices of goods and services. Therefore, when supply exceeds demand for a good or service, prices are bound to fall. Conversely, when demand exceeds supply, prices will rise. If we apply this rule to Ethereum’s current situation, with the supply trending down while the demand is rising, the ETH price will inevitably increase.

More Good News on the Horizon

Ethereum’s shrinking supply and increased demand might be exactly what the altcoin needed to break above the current resistance level and hit new record highs. The context is also favorable for a future price increase. Let’s not forget that we are just a few short months away from the next Bitcoin halving.

Every four years, the reward for mining new blocks on the Bitcoin blockchain is cut in half, reducing the number of coins that get released into circulation. Historically, the event has been correlated with bull runs, so if the four-year cycle is anything to go by, the next bull market might be just around the corner. This means that all coins, not just Bitcoin, are going to experience a significant price increase in the months following the halving.

It's also worth mentioning that the looming rate cuts targeted by the Federal Reserve are also likely to influence events in the crypto space. More exactly, the interest rates on savings will drop, making traditional assets less appealing. As a result, many will turn their attention to alternative options like crypto which promises greater returns, albeit associated with greater risks.

With Ethereum being one of the most established crypto assets in the market, it’s not unreasonable to assume that many investors and traders will want to purchase it to diversify their investment portfolios. At the time of writing, Ethereum was trading at $2,658, with a 5% increase over the past month.

Final Thoughts

Judging by the recent changes in supply and demand, 2024 might be Ethereum’s year. The upgrades outlined in the Ethereum roadmap for 2024 as well as macroeconomic factors also strengthen the belief in a potential resurgence for the altcoin, so ETH’s evolution is something that traders and investors should definitely keep an eye on in the future.