Supply Scarcity and Its Implications
The metric “Percent Balance on Exchanges” measures the proportion of all available ETH held on centralized exchanges. A low value of this metric indicates that more ETH is being held in private wallets, DeFi protocols, or staked for the long term, rather than being readily available for short-term sale. Currently, this metric has reached a new all-time low, indicating a continuing accumulation of ETH.
This reduction in available ETH on exchanges decreases selling pressure and leads to a tighter supply-demand ratio. If demand increases, this could lead to a rapid price increase as less ETH is available for sale.
Technological Developments and Their Impact
Since the London Hard Fork in 2021, a portion of the fees from each Ethereum transaction has been burned, reducing the circulating supply. Following the Merge in 2022, high miner rewards were eliminated, and stakers have since received significantly lower returns. These mechanisms have reduced ETH issuance and initially resulted in deflation. The Dencun upgrade and EIP-4844 have significantly lowered fees on Layer-2, resulting in less ETH being burned on the mainnet. Ethereum has since exhibited a moderate inflation rate of about 0.8% per year.
Market Reactions and Investments
Despite the current price decline, Ethereum shows recovery potential. Investors like BlackRock have reinvested in the market, suggesting a positive long-term outlook. The combination of low issuance and ongoing burning creates a structurally limited supply level that can be bullish for the price of ETH.
Summary
Overall, Ethereum’s supply scarcity indicates a bullish development despite the current price decline. The reduction of available ETH on exchanges, technological developments, and market reactions all contribute to making Ethereum an attractive long-term investment.