Ethereum (ETH) turned into deflation two weeks ago, posting negative net additions for the first time in over a month.
According to ultrasound.money, the net supply or annual inflation rate of Ethereum, the second-largest cryptocurrency by asset value, fell below zero on January 15, to -0.01% at press time. The data shows that this leading smart contract blockchain burns more coins than it mints, in contrast to Bitcoin (BTC).
Still, Ethereum is lagging behind Bitcoin as January draws to a close.
Bitcoin is up nearly 43% this month, while Ethereum is up 36%, CoinDesk data shows. The Ethereum/Bitcoin (ETH/BTC) ratio is likely to fall for the second month in a row.
Here are three reasons for Ethereum’s downfall:
“Shanghai” update is coming
“The biggest reason is defensive positioning due to upcoming Shanghai update. In a few months, we will be able to withdraw ETH from Beacon Chain. These unlocked ETH will be sold. Some people are afraid of that,” Ilan Solot, co-head of digital assets at Marex Solutions, said in an email.
Ethereum’s “Shanghai” upgrade, scheduled for March, will enable withdrawals of 17.2 million ETH deposited on Beacon Chain since December 2020.
All staking balance of 17,260,000 ETH cannot be withdrawn on the day of the upgrade, and only 43,200 ETH can be unstaked per day. However, the total staking rewards of the past two years, about 1 million ETH, can be withdrawn immediately.
There are concerns that the unlocked ETH will immediately hit the market, driving down the price.
“One million ETH available for instant withdrawal is more concerning. Within minutes, everything could be withdrawable and at the same time holders flooded exchanges to liquidate their ETH. Yes, that would drive prices down,” Saxo Bank said in a blog post.
“This sentiment about upcoming selling pressure is likely to become stronger as ‘Shanghai’ approaches,” Saxo Bank noted, expected by some traders shorting Ethereum in the futures market. He added that it could hedge against falling prices.
Macro-led bull market resurgence
Macroeconomic trends have partially fueled the recent cryptocurrency market rally, helping macro-asset Bitcoin to overtake Ethereum.
Recent US government reports and business surveys show lower manufacturing activity and inflation expectations, casting hopes of an early end to the Fed’s monetary tightening that rocked risk assets last year. strengthening. As of Friday, traders see a 55% chance that the Fed will pause rate hikes in May, according to the Chicago Mercantile Exchange (CME).
“This move[big BTC price rally]is based on macro regime changes towards the end of the Fed rate hike cycle, so it is pure monetary policy[so gold is also performing well]I think that in itself reflects that this move is being driven by institutional investors,” said David S. David Brickell told CoinDesk.
Singapore-based crypto fund QCP Capital held a similar view, stating that “all BTC gains this year have occurred during US timezones, with CME futures open interest skyrocketing.” It has said.
Since the 2020 crash, several institutional investors and companies, such as MicroStrategy, have turned to Bitcoin as a hedge against the indiscretion of fiscal and monetary policy. Ethereum, meanwhile, remains a bet on the wider alternative crypto ecosystem.
According to Adam Farthing, chief risk officer for Japan at cryptocurrency trading firm B2C2, Bitcoin’s relatively large rally is due to a short squeeze.
“In Q4 2022, the market held a short position in BTC due to credit risk issues, but this is now being shaken back. The market was not holding a short position in ETH, so there will be no backlash.” said Farthing.
The collapse of Sam Bankman-Fried’s FTX cryptocurrency exchange in early November has increased the risk of market-wide repercussions, leading to a surge in short Bitcoin positions. CME futures traded at record discounts in mid-November, reflecting extreme bearish sentiment.
Bitcoin is the gateway to cryptocurrency investment
So far, the rise of the cryptocurrency market has been led by Bitcoin first, and other cryptocurrencies, including Ethereum, have outperformed Bitcoin.
History seems to be repeating itself, with Bitcoin and stablecoins still the preferred gateway to the crypto market.
“For many macro investors, BTC is the entry point into the cryptocurrency market because it is the most liquid and broadest entry point. volume has not increased much), a surge in open interest at the CME, and strong positioning in the options market show that,” says Noel Acheson, author of the popular newsletter newsletter Crypto Is Macro Now ( Noelle Acheson said.
Finally, the deployment of funds into riskier corners of the cryptocurrency market, such as games and NFTs, also appears to have played a role in slowing Ethereum’s rise against Bitcoin.
“One of our views at the moment is that speculative demand is shifting from ETH to riskier new coins like Aptos (APT) and Solana (SOL). This has become a deflationary asset. Yet it is taking the buying pressure away from ETH,” said Matthew Dibb, chief investment officer at Astronaut Capital.
Gaming tokens such as Axie Infinity (AXS) and Decentraland (MANA) are up 80% and 110% respectively this month, while APT and SOL are also up 420% and 140% respectively, according to CoinDesk data. Some Ethereum holders may have shifted their funds to tokens associated with liquid staking services such as Lido Finance and Rocketpool, whose activity surged after the Shanghai upgrade. is expected.
｜Translation: coindesk JAPAN
｜Editing: Toshihiko Inoue
｜Original: Deflationary Ether Is Underperforming Bitcoin, Here are 3 Reasons Why