Ethereum Deflation Accelerates As Shanghai Upgrade Approaches — Can ETH Price Avoid 30% Drop?
The price of Ethereum’s native token, Ether (ETH), has risen more than 40% so far this year to around $1,750, its highest level in seven months. However, ETH’s price is not out of the woods yet despite several bullish signals in the pipeline, such as the Shanghai upgrade.
Ethereum price bull trap?
Ether’s rise is consistent with similar upside moves elsewhere in the crypto market, responding to slowing inflation that is reducing the Federal Reserve’s likelihood of continuing to raise interest rates.
At the same time, warnings have emerged of an imminent bull trap in the markets, which could wipe out recent gains. Due to its long-term correlation with stocks and Bitcoin, Ether faces similar risks.
Let’s take a closer look at several potential bullish and bearish catalysts for the price of Ethereum below.
ETH has become the most deflationary since the Merge
The issuance rate of Ether has fallen to its lowest level since the network’s transition to proof-of-stake (PoS) via “the Merge” in September 2022.
Ether’s annual supply has decreased by 0.056% since the merger. In other words, the Ethereum network has minted fewer ETH tokens than were removed from supply over the past five months.
Investors typically perceive a cryptocurrency with a fixed supply or deflationary issuance rate as bullish in the longer term.
Ethereum’s supply is currently around 120.50 million, but there is technically no max supply. However, the August 2021 London hard fork introduced a fee-burning mechanism that added deflationary properties to Ether’s tokenomics.
As a result of this upgrade, the higher the Ethereum network’s transaction fees at any given time, the more Ether will be “burned” or removed from supply forever.
Interestingly, Ethereum’s median gas price has rebounded to a seven-month high of 27.13 gwei (the smallest unit of ETH) in the week ending February 17.
Shanghai hard fork
ETH demand must not fall towards a deflationary supply rate for the price to climb. A potential bullish catalyst in the pipeline for Ethereum is the upcoming network upgrade called Shanghai, scheduled for mid-March.
The Shanghai hard fork allows users who have locked their Ether in Ethereum’s PoS smart contract to withdraw their holdings. According to Kennan Mell, an independent market analyst, this increased liquidity could encourage more people to hold and stake Ether tokens.
In his SeekingAlpha article, Mell argues:
“It is possible that the successful implementation of stake withdrawals will increase Ethereum’s price as new investors decide to buy in immediately afterwards, either because they waited to buy until the network successfully went through a risky hard fork to implement withdrawals, or because they are lured by a more fluid return on investment.”
Meanwhile, the total value locked in the Ethereum PoS contract continues to rise to new record highs, with the latest data showing deposits of nearly 16.63 million ETH.
Encryption of betting
However, any bullish catalysts for ETH’s price may be offset by regulatory crackdowns and adverse technical factors in the near term.
In February, the United States Securities and Exchange Commission (SEC) fined crypto exchange Kraken $30 million for failing to register its staking-as-a-service program, which includes Ethereum staking.
Related: Ethereum’s Shanghai Fork Is Coming, But That Doesn’t Mean Investors Should Dump ETH
Coinbase head of exchange Brian Armstrong also warned that the SEC may ban crypto betting services for retail investors altogether. If true, such a ban could hurt Ether’s demand among US investors.
ETH price hits bearish inflection level
From a technical perspective, Ether’s price is testing an important resistance confluence for a potential pullback.
The confluence includes a multi-month descending trendline resistance and a 50-week exponential moving average (50-week EMA; the red wave), as shown below.
A pullback from the confluence could have ETH’s price testing the 200-week EMA (the blue wave) near $1,550 as its short-term downside target.
Furthermore, an extended correction could push the price towards the black rising trendline support near $1,200 by March 2023, down about 30% from current levels.
However, a decisive breakout above the descending trendline resistance could activate a bullish reversal setup towards the $2000-$2500 area.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
