- Standard Chartered Bank says ETH is a better buy than BTC. JP Morgan analysts report that institutional investors prefer ETH to BTC.
- If Ethereum is competing with the global banking system, and the market capitalisation of banks globally is $4tn, then, Ethereum with its supply of 117 million, could have a value of $35,000.
- There are four main reasons why Ethereum’s supply is decreasing and, on some days, actually deflationary.
- $1.8bn worth of Ethereum has been burned since the London Hard Fork on 4 August 2021.
Can Ethereum Still Increase 900%?
A recent investment report by Standard Chartered bank estimates ETH will have 10x appreciation over the coming months. While Bitcoin is often called “digital gold”, Ethereum is quickly becoming the “digital oil” that enables a global banking system to work on top of blockchain technology. By comparing the market capitalisation of the largest credit card companies to the market capitalisation of the largest banks, Standard Chartered researchers argue that Ethereum is a better investment than Bitcoin. They forecast Ethereum to trade in the range of $26,000-$35,000.
This article discusses the four main factors that transformed Ethereum into a deflationary asset. These include burning the base fee for each transaction, staking Ethereum in preparation for the launch of ETH 2.0, locking up Ethereum in decentralised finance (DeFI) applications and Ethereum loss. Also highlighted is why Standard Chartered and JP Morgan are bullish on Ethereum.
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Ethereum’s Available Supply is Decreasing
In August, Ethereum’s software underwent five new changes in what was called the “London Hardfork”. The most important change was EIP-1559. This Ethereum Improvement Proposal (EIP) changed the way transaction fees are calculated on the Ethereum network. Instead of just one fixed fee based on an auction model, Ethereum users now pay a “base” fee plus a tip. The base fee is burned and the tip is given to miners. The goal was not to reduce transaction fees, but rather to reduce transaction fee volatility. The fork achieved the stated goal and has not experienced any major bugs so far.
Ethereum does not have a hard supply limit like Bitcoin, but rather has ongoing inflation capped at 18m ETH per year, used to reward miners. There is approximately 117m ETH in existence already. During the last 70 days, the Ethereum network minted 923,365 ETH in block rewards, uncle rewards and uncle inclusion rewards. Over half, or 55.83%, of the ETH collected was base fees that were subsequently burned. On some days, more ETH was burned than minted. This means that more ETH is being burned than issued. For the first time, ETH has become a deflationary asset.
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In addition to approximately 3.4 ETH being burned every minute now or approximately 1.8m per year, the second reduction stems from ETH being locked in preparation for the launch of ETH 2.0. In order to launch ETH 2.0, there needs to be a minimum of 262,144 validator nodes each staking 32 ETH. Therefore, this means a total of 8.4m needs to be staked. Currently, there are 7.2m ETH staked in ETH 2.0 validator nodes. Therefore, approximately 1.2m more ETH is expected to be removed from circulating supply over the coming weeks and months.
By looking at the Ethereum being staked in preparation for the launch of ETH 2.0 and the daily amount of Ethereum being burned, Standard Chartered calculates that Ethereum’s annual inflation rate has dropped from 2.5%, at the beginning of 2021, to a negative 2.2% in September. This deflation rate is expected to continue increasing.
“The expectation should be for circulating issuance to stabilize around 5,000 to 8,000 new ether per day—this range representing an average token burn from 40% to 60%. At current prices this implies that $15MM to $25MM of new money is required to flow into the Ethereum network daily to maintain the current price—down from about $40MM with the issuance seen before EIP-1559.” – Below the Surface of EIP-1559, Data Always
In addition to the two primary reasons given by Standard Chartered’s report on why Ethereum’s available supply is shrinking, there are two more reductions that are also impacting the market. First, the amount of Ethereum locked in decentralised finance applications is over $26bn at the time of writing. This removes Ethereum from the tradable supply. Secondly, there is an ongoing rate of Ethereum loss. Due to the extremely limited supply of Ethereum on the market, shorters may find themselves in a tough position if there is a short squeeze.
Holding demand constant, a reduction in available supply should paint a rosy outlook for Ethereum’s price. However, demand will most likely not stay constant, but rather, demand is expected to continue to increase over time. Ethereum is already needed in order to run smart contracts, participate in decentralised autonomous organisations, mint non-fungible tokens, trade stablecoins, and invest in initial coin offerings. As adoption of these use cases increases, users will need to buy more Ethereum. Some users may even buy Ethereum months or years before they need to use it, so that they can lock in a price for this digital commodity or “oil”.
Growth in current and future demand for ETH may be why the supply of ETH on exchanges is at historically low levels. In January 2021, the supply was 23.3m. Since then, the supply has dropped by 27%, down to 18.7m. This is also a bullish indicator that investors are not planning to sell their ETH soon.
JP Morgan’s recent Global Markets Strategy research report echoes the on-chain indicators. By analyzing futures spreads on the CME, they found that institutional investors currently prefer Ethereum over Bitcoin. Essentially, Ethereum stayed in a healthy contango where the difference between Ethereum futures prices and spot prices remained positive and actually increased in September, in contrast to Bitcoin that moved into backwardation. According to the JP Morgan analysts, this “points to a much healthier demand for [ether] vs. bitcoin by institutional investors”.
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