One trait that has made cryptocurrencies, particularly Ethereum, so desirable to investors is that they withstand inflation. The question now is: What is inflation? Inflation can be defined as the rate of increase in prices over a given period of time. At lower rates, inflation keeps the economy healthy, but it can lead to lower purchasing power when inflation rises swiftly. Ethereum can be a sound hedge against inflation because it follows inflation markets meticulously, demonstrating its procyclical nature as a networked asset. The current Ethereum price is the result of support from large wallet investors.
Ethereum wasn’t deflationary until the Merge occurred in September 2022. It had an inflationary supply from the outset, increasing at a per-year rate of 4,5%. Ethereum became a non-inflationary asset due to its burn mechanism when it transitioned from proof-of-work to proof-of-stake. To be more precise, the number of tokens burnt to maintain the network outpace the number of coins entering circulation. By implementing the EIP-1559 protocol, the London Hard Fork Update, Ethereum has become more deflationary than Bitcoin.
Ethereum’s Supply Has Increased by Roughly 30,000 ETH
In the last couple of days, Ethereum’s supply has grown considerably, which is the result of its increasing adoption and usage. According to Decrypt, the Ethereum supply is at a current level of 30,000, which corresponds to $47.9 million. The marked growth is mainly driven by the fall in the transaction flow – fewer collectors are trading NFTs, not to mention that DeFi’s financial activities have declined. When the supply of a cryptocurrency increases, the value of each token decreases, so investors experience a decrease in the value of their investments.
It’s logical to assume that the higher the inflation, the worse the price performance of Ethereum. Ethereum started removing a part of each transaction fee from circulation with each new transaction. The fee-burning mechanism made a difference in the overall number of coins after implementing the Merge. The higher the gas prices are, the more tokens are burnt by the network (or forever removed from circulation). Ethereum gas fees have dropped to their lowest level since November 2022, meaning an average network transaction now costs seven gwei.
What Happens If Ethereum Gas Fees Are Too Low?
Gas is the fee necessary to conduct transactions or execute smart contracts on the Ethereum blockchain. Fees are designated in gwei, the smallest denomination of Ethereum, and they exist because operating on the network uses resources in the form of computational power. The exact price of gas is determined by the supply, demand, and network capacity at the moment of the transaction. For example, if you’d like to send Ethereum to a friend, and the network is busy, you’ll need to set a higher gas price to get your transaction processed immediately.
High gas fees have a direct impact on the users of the Ethereum network, affecting the health and sustainability of the blockchain. There’s no way to avoid gas fees for Ethereum transactions altogether. Nevertheless, it’s possible to enjoy affordable gas fees, reducing expenses when using the Ethereum blockchain. If high gas fees are due to the popularity of Ethereum, lower gas fees are the result of a lack of interest in Ethereum. If fewer coins are removed from circulation, Ethereum’s supply becomes inflationary, which could affect the network’s long-term financial health.
From Deflation Hopes to Inflation Challenges
Those involved in governing the development of Ethereum don’t seem to be concerned about the current events. Taking everything into consideration, is Ethereum becoming inflationary again insignificant? What’s certain is that it will be necessary to spend more tokens to acquire goods or services. Ethereum is currently inflationary, so its value is expected to reduce over time, so investors will have no choice but to cut their losses by trying to sell their investments. Ethereum’s planned developments have always been on track, yet investors must identify other catalysts for reversing the current downtrend.
As the overall supply of Ethereum increases, its intrinsic value decreases, so more tokens will be necessary for an ordinary purchase. As mentioned earlier, transaction costs associated with Ethereum have fallen, meaning it’s now a better payment option. You need a wallet from which to send Ethereum payments; it will allow you to read your balance and verify your identity. Ethereum offers a fast, secure, decentralized way of making payments and undertaking complex transactions. To protect users from unauthorized access, blockchain transactions are encrypted.
Short-Term Inflation Is Below Other Chains
Ethereum attracted traditional investors who saw the cryptocurrency’s potential as a hedge against inflation. Inflation is below the all-time high and well below other chains, so it can be viewed as a spot rate. A decrease in Ethereum price is expected to be temporary. Cryptocurrency prices tend to be more volatile and affected by seasonal factors, which may not reflect the underlying trends of inflation. Inflation worldwide has reached multi-decade highs, leading to a jump in borrowing costs to address the escalating crisis. Many asset classes, including cryptocurrencies, will likely see their prices fall.
Higher rates translate into bad news for Ethereum because investors have fewer incentives to buy cryptocurrency, which is most certain to add pressure. Investing during times of inflation is challenging, but it’s possible to reap a profit by changing your strategies or reallocating. Of course, there are no guarantees because the economic conditions sometimes take us by surprise. Buy Ethereum when it’s hit a bottom price and sell when its price peaks. Attention must be paid to the fact that the number won’t tell you the entire story about Ethereum’s prospects, so do your homework to understand in what direction the price is heading.
The Bottom Line
The Ethereum supply and demand was altered to make the cryptocurrency deflationary. Recently, we’ve witnessed a growth in Ethereum inflation, with the circulating supply increasing markedly. It’s what economists call excess supply. When the supply is greater than the demand, prices drop. Ethereum doesn’t have a fixed or predictable inflation rate, so no one knows for sure what will happen in the future. Only time will tell how an inflationary supply will impact the network’s economic security and sustainability.
