Ethereum (CCC:ETH-USD) is sustaining its downward trend which began in early November.
Given that fact, it’s arguable that few probably want to hear another discussion of why that has come to be.
Instead, let’s look into the deflationary pressure being exerted on ETH, and why that’s a good thing for its price moving forward.
One of the overarching factors for bullishness around Ethereum relates to deflationary pressure. To understand this pressure it’s necessary to understand Ethereum’s supply, the London Hard Fork, and Ethereum improvement proposals.
Supply is at the heart of any asset and its prices. Fundamentally speaking, the more there is of something, the less valuable it is bound to be. With digital assets there is no theoretical limit on supply.
As an example, if Ethereum was so inclined, it could simply issue as many ETH as it wished. In practice that would be a poor decision because it would make each successive ETH minted less valuable.
That’s what’s at the heart of bullishness surrounding Ethereum moving into 2022.
The London Hard Fork is a set of five EIPs, or Ethereum improvement proposals. The most important of which was EIP-1559.
EIP-1559 upgraded the bid system for one, and, more important to the purposes of this discussion, it removes a portion of the ETH supply from circulation during every transaction.
And when the supply of an asset shrinks, its value rises in theory. Thus, over time, Ethereum’s supply should shrink. That means it becomes rarer, and therefore more valuable.
Although the overall supply hasn’t begun to shrink, the trend toward that occurring is clearly happening.
Toward Deflation
This chart of the Ethereum supply indicates a clear demarcation line. In early August the supply curve noticeably flattens. That is no coincidence: The London Hard Fork occurred on Aug. 5.
This is part of a greater transition in which Ethereum moves from proof of work to proof of stake.
Anyway, the more important thing to note is that a portion of each ETH is being removed from circulation with every successive transaction of ETH.
The curve has already begun to flatten. In fact, according to this article, 1.2 million ETH have been removed from the supply since EIP-1559 was implemented in early August. The same article notes that 6.28 ETH are currently being burned every minute.
So, in short, EIP-1559 is a step toward deflation of Ethereum. It’s important to note that although the increase in supply is slowing, it hasn’t yet become deflationary.
Not Yet Deflationary
Since EIP-1559 was implemented the ETH supply has increased from 117.19 million to 117.92 million. In other words, the supply of ETH has grown by 0.62%.
Between the beginning of 2021 and the implementation of EIP-1559 however, the ETH supply grew by 2.73%, from 114.08 million to 117.19 million.
So, although ETH has yet to reach true deflationary status, it’s on the way.
What to Do
Given that Ethereum has suffered of late, this may be a buy-the-dip moment. The argument in favor of ETH going deflationary makes a lot of technical sense.
As I noted, supply growth has decreased to 0.62% since the implementation of EIP-1559. More and more crypto investors are beginning to understand the tokenomics definition. That bodes well for ETH.
ETH has already undergone periods of a week in which it was truly deflationary back in November. That is a massive step in increasing the value of Ethereum moving forward.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
