Ethereum’s deflation accelerates as Shanghai upgrade looms — Can ETH price avoid a 30% drop?

A deflationary Ethereum supply does not necessarily mean a bullish market for ETH, at least in the near term.

The price of Ethereum’s native token, Ether (ETH), has surged by more than 40% year-to-date to around $1,750, the highest level in seven months. However, ETH’s price is not out of the woods yet despite several bullish cues in the pipeline, such as the Shanghai upgrade.

Ethereum price bull trap?

Ether’s rise aligns with similar upside moves elsewhere in the crypto market, responding to lowering inflation that reduces the Federal Reserve’s likelihood of continuing to raise interest rates.

At the same time, warnings about an imminent bull trap in the markets have emerged, which may wipe out recent profits. Due to its long-term correlation with stocks and Bitcoin, Ether faces similar risks.

Bull Trap About to confirm on $ETH and $BTC along with shooting stars on both. Failed breaks usually trigger the biggest opposing moves. You have been warned. If stocks do dump, reversal signal on crypto can follow. Close > that shooting star candle invalidates the trap. pic.twitter.com/tJ9c5N0M3J

— Cameron Fous (@Cameronfous) February 16, 2023

Let’s take a closer look at several potential bullish and bearish catalysts for the price of Ethereum below.

ETH becomes most deflationary since Merge

The issuance rate of Ether has dropped 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 reduced by 0.056% since the Merge. In other words, the Ethereum network has minted fewer ETH tokens than were removed from the supply in 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 #deflation #rate is accelerating by the day. This has very positive impact on the supply/demand dynamics, and should send the price a lot higher as demand increases. I think this is happening very soon. #ETH #ETHE pic.twitter.com/dnHVKBabuf

— Jesse Dow (@JesseLeeDow1) February 16, 2023

Ethereum’s supply is currently around 120.50 million, but there is technically no max supply. However, the London hard fork in August 2021 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 the supply forever.

Interestingly, Ethereum’s median gas price has rebounded to a seven-month high of 27.13 gwei (the smallest ETH unit) in the week ending Feb. 17.

Shanghai hard fork

ETH demand must not drop against a deflationary supply rate for the price to climb. One potential bullish catalyst in the pipeline for Ethereum is its upcoming network upgrade dubbed Shanghai, slated for mid-March.

The Shanghai hard fork enables users who have locked their Ether into Ethereum’s PoS smart contract to withdraw their assets. 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’s possible that the successful implementation of staking withdrawals will boost Ethereum’s price as new investors decide to buy in right afterward, either because they were waiting to buy until the network successfully went through a risky hard fork to implement withdrawals or because they are lured by a more liquid staking yield.“

Meanwhile, the total value locked in the Ethereum PoS contract continues to rise to new record highs, with the latest data showing deposits of almost 16.63 million ETH.

Crypto staking crackdown

However, any bullish catalysts for ETH’s price could be offset by regulatory crackdowns and unfavorable technicals in the near term. 

In February, the United States Securities and Exchange Commission (SEC) fined crypto exchange Kraken $30 million for not registering its staking-as-a-service program, which includes Ethereum staking.

Related: Ethereum’s Shanghai fork is coming, but it doesn’t mean investors should dump ETH

Coinbase exchange CEO Brian Armstrong also warned that the SEC might ban crypto staking services for retail investors altogether. If true, such a prohibition could hurt Ether’s demand among U.S. investors.

Resembles poor financial advice to diversify into stocks in an economy of high FFR and inflation

But, SEC wanting to ban staking is valid

Major exchanges like #Binance can no longer offer in-app staking

AND

PoS protocols like #Ethereum will be subject to security laws & taxes https://t.co/1YxpVNxD0B

— oracledaddy (@oracIedaddy) February 20, 2023

ETH price hits bearish inflection level

From a technical perspective, Ether’s price is testing a key resistance confluence for a potential pullback.

The confluence comprises a multimonth 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 test the 200-week EMA (the blue wave) near $1,550 as its short-term downside target.

Furthermore, an extended correction could push the price toward the black ascending trendline support near $1,200 by March 2023, down about 30% from the current levels.

However, a decisive breakout above the descending trendline resistance could activate a bullish reversal setup toward the $2,000–$2,500 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.