With the recent market rally, it's difficult to remember that Ethereum's (ETH -2.31%) price is still down more than 60% from its all-time high of around $4,600. So despite gaining some serious momentum and increasing more than 40% to start off 2023, Ethereum is still in the depths of crypto winter.
But there are reasons to believe that this winter is beginning to thaw just like others in the past. And that's why I am a heavy buyer at today's prices.
An uptick in activity
Two metrics factor into my conviction of buying this dip, and they both help us understand a simple but essential dynamic in Ethereum's price -- supply and demand.
We can measure demand in a few ways. The first would be to look at the number of unique addresses on the network. Today, it sits at an all-time high of more than 171 million and has been growing even amid the current crypto winter.
But because Ethereum's primary use is derived through its smart contracts, the number of smart contracts being created can provide more granular insight into activity and demand on the blockchain. Looking at the number of new smart contracts, one thing immediately becomes clear: The network is experiencing a boom.
After more or less lacking any activity for much of 2022, there was an uptick in the number of smart contracts created in the fourth quarter of 2022. On Dec. 31, 2022, a yearly high was reached when nearly 140,000 new smart contracts deployed -- a level not seen since the summer of 2021 before Ethereum went on its run to an all-time high.
This activity has been sustained into the new year and could signal that Ethereum once again has life and that demand is increasing. While this is more than welcomed news after the blockchain barely registered a day of more than 20,000 for most of 2022, what is of more importance are the dynamics around Ethereum's supply.
A new valuable upgrade
In August 2021, Ethereum developers implemented an upgrade to the network known as the London hard fork. This upgrade laid the foundation for The Merge -- a later upgrade that would transition Ethereum from proof-of-work to proof-of-stake -- and subsequently ushered in a new era for Ethereum so that its total supply could actually decrease.
As a result of the London hard fork, a new burn mechanism was introduced that would permanently remove ether from its circulating supply and turn Ethereum into a deflationary asset. Until this point, Ethereum's inflation rate was around 3.5% and unlimited ether could enter circulation. Unlike inflationary assets, which struggle to maintain value, deflationary assets typically increase in value with time.
While there is still technically an unlimited amount of ether that could be created, the burn mechanism made it so that a portion of the fees previously allocated to miners on proof-of-work would now be permanently destroyed. The more transactions are made on the network, the more ether is burned.
It took a little more than a year for this deflationary pressure to occur, but it looks as though Ethereum has finally entered a truly deflationary stage. Today, the number of ether is actually decreasing and now boasts a deflation rate of -0.053%.
This is the primary reason Ethereum looks so attractive today. Now that it has finally entered a deflationary era, investors can truly begin to reap the benefits of the London hard fork and The Merge. With its price still well off from its all-time high, allocation at today's levels could set up a portfolio for long-term success.
