What’s Behind the Recent Ethereum Rally
One of the first principles they teach in any Economics 101 course is that price is a function of supply and demand.
When supply is decreasing and demand stays constant, prices go up.
When supply is increasing and demand stays constant, prices go down.
The price of any good or service arrives at the intersection of supply and demand.
This simple economic concept explains Ethereum’s recent price rise and why it could be setting up for a big rally into the end of the year…
Ethereum’s Huge Upgrade
Ethereum’s price is rising because there’s increasing demand and diminishing supply occurring at the same time.
The first change is on the supply side.
As my colleague Steve Fernandez and I explained in our YouTube video last week, the world’s second-largest cryptocurrency went through an upgrade that changes how the network handles transactions.
It’s called Ethereum Improvement Proposal 1559, and it changes the incentive structure for Ethereum miners.
Previously, miners were paid by users every time they validated part of the blockchain.
However, with the new upgrade, miners no longer get income from transaction fees.
The fee that a user pays is now “burnt,” meaning it reduces the supply of Ethereum.
Etherchain.org tracks how many have burned since the upgrade.
Since August 4, 17,700 Ethereum have been burned. These are now gone forever.
If we multiply the current price of Ethereum ($3,100) times the amount burned, that means nearly $55 million has been removed in just a few days!
And at a rate of 2.84 Ethereum burnt per minute, it implies there will be 592,992 burnt through the remainder of the year.
The Rise of Decentralized Finance
The second reason for Ethereum’s move has to do with the demand side of the equation.
Specifically, it’s the rise of decentralized finance, or DeFi for short.
As I’ve mentioned in previous Smart Profits Daily updates, DeFi requires investors to stake their Ethereum and other DeFi tokens.
In doing so, they secure their network and recreate different financial services on the blockchain.
In the past four years, the amount of Ethereum locked in DeFi has risen from zero to 9.4 million today.
Here’s a chart of this from DefiPulse.com:
Given it’s current circulating supply of 117 million, that implies 8% of it is currently locked in DeFi protocols and not freely traded.
I expect the amount of Ethereum locked in DeFi to climb as investors continue to chase the higher yields offered in DeFi.
And this would be good news for the price of Ethereum.
Editor, Strategic Fortunes