The supply of Ethereum (ETH) has returned to levels seen before The Merge, sparking concerns about its potential impact on the price of the cryptocurrency.
To provide context, The Merge initiative, which involved the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) in September 2022, aimed to achieve several objectives.
These objectives included enhancing energy efficiency, reducing the issuance of ETH (supply), and laying the groundwork for future scalability enhancements.
However, the recent shift in the dynamics of ETH supply, with over 120.5 million ETH back in circulation, suggests that one of the primary goals has not been met.
Is ETH Expected to Fall Further Behind BTC?
Recent data from UltraSound Money reveals that more than 46,000 ETH were added to the supply in the last 30 days alone. The growth in supply has accelerated since the implementation of the blob upgrade in Q1 2024.
This upgrade made Layer 2 (L2) transactions more cost-effective and redirected demand from the base Layer 1 (L1) to L2s, resulting in a reduction in the quantity of ETH being burned.
Consequently, the deflationary efforts for ETH were reversed following the blob upgrade, and it took less than a year for the supply to rebound to pre-Merge levels.
So, what implications does this have for the price of ETH and its holders? ETH has experienced a decrease of over 65% compared to BTC since The Merge.
The ETH/BTC pair monitors ETH’s relative price performance against BTC, and the drop suggests that investors favored BTC over ETH following The Merge.
Cryptocurrency analyst Benjamin Cowen had previously foreseen that the growth in ETH supply back to pre-Merge levels could hinder the ETH/BTC pair’s performance and suppress ETH’s upward momentum.
While there are strategies in place to promote the adoption of blobs and enhance L1 scalability, which are likely to contribute to an increase in ETH burn rates, the current dynamics of supply may dampen short-term sentiment towards the altcoin.
Moreover, the prevailing macroeconomic uncertainties in the wider market could limit ETH’s prospects.
As per the analysis of crypto trader Cryp Nuevo, there is a possibility that ETH may dip below $3,000 to rectify the imbalance in price indicated by a recent lower candlestick wick (approximately 50% of the total wick).
If Nuevo’s forecast materializes, ETH could fluctuate below the $3,000 mark for an extended period.