Ethereum’s deflationary supply has been making headlines recently, with the total ETH supply dropping by nearly 2.5% in the past 30 days. This is due to the network’s transition into a proof-of-stake consensus, which has positively impacted the asset’s supply and overall growth(1). The net inflation rate has been negative since the end of January, which means that individual ETH tokens are becoming scarcer at a faster rate(2). Analysts believe that this could boost the cryptocurrency’s price in the long run.
There are two key deflationary tailwinds that could help Ethereum outperform Bitcoin. The first is the EIP-1559 burn, which has been reducing the supply of Ether(2). The second is increased staking participation, which could remove tens of millions of unstaked ETH tokens from the immediately circulating supply(2). It is reasonable to expect that the ETH staking participation rate could rise to 40-50% in the coming years(2).
Investors typically perceive a cryptocurrency with a fixed supply or deflationary issuance rate as bullish in the longer term(3). Ethereum’s deflationary supply could have a positive impact on its price(2). A constant record high in deflation and a continual plummet in Ethereum supply could eventually leave ETH price to be valued way higher than it is now, especially as demand continues to increase(1).
Bloomberg Intelligence senior macro strategist Mike McGlone warns that crypto and risk assets may be in for a correction due to potential deflation and recession(4). McGlone shares a graphic comparing ETH/BTC, the NASDAQ, and the Federal Reserve money supply, suggesting an incoming correction in the stock market and perhaps crypto as well(4). Markets may be adjusting to a developing period of disinflation brought on by the harsh reversal in monetary policy from the Federal Reserve