Will Ether’s Supply Crunch Lead to Higher Prices in Q4?

Is it fair to blame Ethereum for the current market volatility? Not necessarily. The overall market is experiencing turbulence, with investor sentiment being uncertain due to mixed expectations. Although there have been rate cuts and regulatory support, fears of a recession, rumors about large Bitcoin sales from Mt. Gox creditors and the U.S. government, and the lack of market gains despite a positive economic environment are causing worry. Additionally, concerns over an economic slowdown and geopolitical tensions are further dampening investor interest.

But if we look behind the gloom, there’s another story. Ether’s price might be falling, but its liquid supply is shrinking. If demand picks up next quarter, we could see a supply crunch that pushes prices higher. Here’s why:

The increase in exchange reserves is hardly a glut

Various news sources such as FXStreet and AMBCrypto have pointed out a substantial increase in the amount of ether held in exchange reserves, suggesting that this could lead to increased selling activity and potentially cause prices to drop even more.

This happens due to an excess (or high availability) in the market, which can lead to a decrease in prices, possibly triggering a mass sale if numerous investors become fearful and quickly dispose of their cryptocurrency assets to minimize losses. A recent example occurred when the German government unexpectedly sold its $3 billion worth of confiscated bitcoin only a few months back.

Despite a 78% increase in Ether’s value ($2,282 to $4,066) from January to March nearly vanishing (now $2,321), ether exchange reserves have decreased by 10% since the beginning of the year, which is surprising as prices and reserves typically move in opposite directions. This could indicate that investor faith in Ether’s long-term worth potential remains robust.

Ether staking deposits continue to climb

Despite a 42% decrease in the price of Ether from its record peak, the amount being deposited for staking has steadily increased by almost 20% since January. Currently, over 34.5 million Ether (equivalent to approximately $81.3 billion) are locked up for staking, representing 28.8% of the total supply. This is a new record high.

It appears that investors are either keen to earn greater returns by reinvesting in platforms such as EigenLayer or Symbiotic (more recently), or they prefer a less risky, lower-reward approach through traditional reinvestment options and protocols. Regardless of the choice, the value of dollars has decreased, but the amount of Ether has increased.

The desire for staking and re-staking remains unchanged, even as Ether’s prices fall. If this pattern holds, it will keep on reducing the amount of Ether available in circulation.

Big underperformance

The performance of Ether’s price relative to Bitcoin and Solana has been significantly lackluster, and the underwhelming debut of Ether spot ETFs (which have primarily experienced net withdrawals) has contributed to a pessimistic outlook.

It took several months following BlackRock’s Bitcoin ETF application before the crypto market experienced growth, culminating in a year-end rally. Since that time, Bitcoin has increased by 114%, Solana has skyrocketed by 564%, yet Ethereum has only managed to grow by 27%.

Lately, Solana’s token performance and network growth have been noteworthy, as transaction volumes have surged by 50% since the beginning of the year and peaked at a record high of 3.9 million active addresses. However, its market share (3.02%) pales in comparison to Ethereum’s (13.56%) in the current $2.05 trillion crypto market. It’s also relevant to note that much of Solana’s significant activity is centered around memecoins. The question arises: Is this growth trajectory sustainable in the long run?

Year-end rally?

Following a prolonged stretch of poor performance, it seems that pessimism regarding Ether might be reaching its lowest point. A surge in investments into Ethereum ETFs could potentially provide the spark necessary to initiate a shortage in supply and unexpected price increases for Ether.

Under advantageous economic conditions marked by decreasing interest rates and increased liquidity, regulatory endorsement, along with heightened institutional enthusiasm for crypto Exchange-Traded Funds (even among traditionally cautious institutions like state pension funds), it appears that a fresh tide of institutional investments could be imminent.

Currently, the crypto market hasn’t factored in these favorable underlying factors yet, leaving room for a swift recovery or surge in prices.

Should we bring together an increase in incoming funds along with Ethereum’s diminishing liquid reserves, any sudden spikes in Ethereum’s value could occur swiftly and intensely.

Note: This article represents the opinions of the writer, which may not align with those held by CoinDesk, Inc., its proprietors, or associated entities.