Could Ethereum’s Return to Pre-Merge Supply Levels Affect Its Recovery Potential?

• The recent surge in Ethereum’s supply to pre-Merge levels raises critical questions about the altcoin’s future performance and investor sentiment.

• As Ethereum supply hit 120.5 million tokens, analysts predict this dynamic may lead to sustained underperformance against Bitcoin.

• “With the supply increase, Ethereum’s deflationary mechanisms appear compromised,” stated a prominent analyst at COINOTAG.

Ethereum’s supply surge back to pre-Merge levels prompts analysis of its price trajectory and performance against Bitcoin amid market uncertainties.

Impact of Ethereum’s Supply Dynamics on Market Performance

The recovery of Ethereum (ETH) supply to over **120.5 million tokens** is a significant shift in the post-Merge landscape. Historical data from UltraSound Money indicates that the increased supply has implications for Ethereum’s long-term price stability. Following the Merge—Ethereum’s pivotal transition to a Proof-of-Stake (PoS) consensus—the expectation was a reduced supply, which would theoretically underpin price appreciation as demand outpaced issuance.

However, the recent findings suggest that ETH’s deflationary measures, intended to counteract supply inflation, are faltering. The increase in supply can be traced back to upgrades aimed at enhancing Layer 2 (L2) capabilities, which, while beneficial for transaction costs, have disrupted the expected deflationary momentum.

Ethereum’s Supply Growth and its Relative Performance to Bitcoin

The abrupt addition of **46,000 ETH** to the supply within just 30 days, post the blob upgrade in Q1 2024, signals a shift in the market dynamics that may hinder ETH’s performance against Bitcoin (BTC). The ETH/BTC trading pair, which reflects the relative price performance of ETH in comparison to BTC, has seen a **65% decline** since the Merge, illustrating a marked investor preference for Bitcoin amidst these supply changes.

Crypto analyst **Benjamin Cowen** previously expressed concerns, stating, “The resurgence of ETH supply to pre-Merge levels could substantially cap any rally in the ETH/BTC trading pair.” This sentiment is echoed by other market experts who believe that the increase in supply is more than a short-term fluctuation; it represents a fundamental issue that could discourage Ethereum investments moving forward.

Source: ETH/BTC, TradingView

Market expectations also indicate that without a robust recovery plan for ETH burn rates following the blob upgrade, Ethereum may continue to struggle against Bitcoin’s relatively stable growth trajectory. The positive developments for Ethereum, such as plans to enhance **blob adoption**, may take time to materialize and confront the pressing supply dynamics currently affecting market sentiment.

Broader Market Trends Impacting Ethereum’s Outlook

In the context of broader economic instability, Ethereum’s current supply challenges could further exacerbate an already tense market situation. Macro-economic factors, such as inflation concerns and regulatory scrutiny, continue to weigh heavily on crypto markets. Analyst community predictions suggest that ETH might revisit levels below **$3K**, subject to fulfilling certain price imbalances.

Trader **Cryp Nuevo** highlighted the potential for Ethereum to drift lower, stating, “To align with recent price performance, ETH may need to retrace significantly to regain balance, closing in on critical psychological levels.” This sentiment emphasizes the pressing nature of the market’s reaction to the recent supply metrics and highlights the challenges ETH must confront moving forward.

Source: X

Conclusion

The upswing in Ethereum’s supply back to pre-Merge levels raises important considerations for investors. The potential hurdles posed by supply dynamics and relative performance against Bitcoin suggest that Ethereum’s road to recovery may be fraught with challenges. As market participants navigate these complexities, maintaining awareness of both supply pressures and broader macroeconomic influences will be crucial for future investment strategies.