It’s been a little more than a month since the Ethereum merge and one of the big changes that investors were looking forward too has now taken place: ether has become a “deflationary” asset. In crypto terms, that means that the supply of ether is now decreasing rather than increasing. But while many investors hoped that would push the cryptocurrency price higher (assuming there was no change in demand), it hasn’t yet happened in a significant way. Despite basic supply and demand dynamics on the network, the macro backdrop still has a strong hold on crypto prices. “Theoretically speaking, if we see a deflationary environment then there should be upward pressure on the price, but there are other factors that affect the ether price,” said Owen Lau, an analyst at Oppenheimer. “These tokens are still correlated with equity prices, with the macro environment. That actually has a larger impact on the price currently than supply and demand.” Things could reverse Plus, he added, there’s a chance that things could reverse, and the digital asset could become “inflationary” again. The price of ether has been slightly lower since the post-merge sell-off in mid-September. As of Tuesday afternoon it was down about 4% over the past month and the same amount on a month-to-date basis. The supply of ether decreases when the amount of ether “burned” on the network, or destroyed and removed permanently from circulation, is greater than the amount being created. The burn function is a “scarcity engine fueled by Ethereum’s transactional utility,” according to data provider Ultrasound Money. Last week, gas fees, or transaction fees, were high, likely as a result of higher traffic on the network. Ethereum uses those gas fees to burn tokens, so with higher fees the network had more money to burn. “We don’t know when the Fed will pivot, we don’t know the next CPI number, but there are some network specific things that could change the price,” Lau said. “If there are more use cases built on top of Ethereum, that can also support the ETH price,” he added. “If there’s another big NFT launch or a big sale and they’re using ETH to be the medium of exchange, that could increase the demand as well. We just don’t have all these catalysts, it seems like we just have not heard about them other than the merge itself.” Staked ether has been increasing. At some point if the staked ratio goes high enough, then this deflationary scenario could actually turn back to inflationary. High gas fees can always come down however, Lau said, and that would mean the network would have less ether to burn. “At some point, if you burn less ETH but at the same time people stake more, then you could see the network cross another equilibrium where the net supply would increase,” he said. “It would become an inflationary asset… This situation may not last forever.”
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