Ethereum Could Take Months to Be Deflationary: What About ETH’s Bull Run?

Ethereum (ETH), the second-largest cryptocurrency by market capitalization, has recently experienced significant market activities, including a potential transition towards a deflationary state. However, this shift is expected to take several months. Amidst this backdrop, the ongoing speculation around Ethereum ETF approval has added another layer of complexity to the market sentiment and price dynamics of ETH. This article explores the implications of these developments and evaluates whether Ethereum’s bull run is sustainable.

Ethereum’s Current Inflationary State

Ethereum’s status as an inflationary asset has been a topic of intense debate within the cryptocurrency community. The current issuance rate of Ethereum stands at approximately $10 million per day, as reported by Bitwise’s Chief Investment Officer, Matt Hougan. This figure is corroborated by data from Glassnode, which shows a daily issuance of 2.58K ETH, translating to roughly $9.5 million at the press-time market prices of $3,700 per ETH.

The Dencun upgrade significantly impacted Ethereum’s issuance and burn rates. Post-upgrade, Ethereum lost its deflationary status, with the issuance rate outpacing the burn rate by a factor of three. This trend has been consistent over the past 30 days, as well as on a shorter, seven-day chart. The current excess supply of ETH poses a potential barrier to price growth, as it may dilute the value of existing tokens in the market.

The Road to Deflation

According to Ethereum educators and analysts, it could take several months for Ethereum to return to a deflationary state. The burn mechanism, introduced to reduce the supply of ETH, needs to surpass the issuance rate to achieve deflation. The timeline for this transition is uncertain and depends on several factors, including network activity, gas fees, and broader market conditions.

Impact of ETF Approval Speculation

Despite the inflationary concerns, the speculation surrounding Ethereum ETF approval has injected bullish sentiment into the market. The approval of a spot Ethereum ETF by the U.S. Securities and Exchange Commission (SEC) is anticipated to be a significant catalyst for price appreciation. According to Bernstein, a private investment firm, Ethereum could rally by 75% to $6,600 if the ETF approval is confirmed. This projection is based on the price action of Bitcoin following its ETF launch in January.

Similarly, QCP Capital, a crypto asset trading firm, expects ETH to stabilize in the short term and rally in the mid-term. The firm noted that ETH perpetual funding went from 50% to flat in 12 hours, with June forwards still yielding 15%. This indicates diminished short-term speculation but sustained medium-term bullishness.

Market Sentiment and Technical Analysis

The sentiment among Ethereum investors is cautiously optimistic. Ethereum whales have been positioning themselves for the potential ETF approval, indicating a belief in the cryptocurrency’s long-term value. However, short-term volatility cannot be ruled out. Ethereum’s price has been consolidating below $3,800, which is 22% down from its all-time high of $4,867.

Technical indicators suggest a mixed outlook. The NVT (Network Value to Transactions) ratio indicates that Ethereum might be overvalued, which could lead to a price correction. Additionally, the recent drop in the MVRV (Market Value to Realized Value) ratio points to a potential short-term decline.

Long-Term Prospects

In the long term, Ethereum’s prospects remain strong. The network continues to see significant development activity and growing adoption. The transition to a deflationary state, while delayed, is expected to provide a substantial boost to ETH’s value once achieved. Moreover, the potential ETF approval could attract substantial institutional investment, driving further price appreciation.

Conclusion

Ethereum’s journey towards a deflationary state is expected to take several months, influenced by network activity and market conditions. Despite short-term inflationary concerns, the bullish sentiment driven by potential ETF approval and strong development activity provides a positive outlook for ETH. Investors should monitor key metrics and market trends to make informed decisions, balancing short-term volatility with long-term growth potential.