Bitcoin (BTC -1.38%) might be stealing the spotlight recently as the race for a spot exchange-traded fund (ETF) heats up. However, the second-most valuable cryptocurrency, Ethereum (ETH 2.60%), shouldn't be overlooked as a solid investment option.
Despite remaining well off its all-time high, signs are emerging that Ethereum might be building momentum to reclaim previous levels. As dynamics around supply and demand continue to evolve, Ethereum's price is positioned to benefit. But does it have enough to reach its previous all-time high of nearly $5,000?
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Staking finally picks up
In September 2022, Ethereum underwent a significant transition from a proof-of-work to a proof-of-stake consensus mechanism known as The Merge. This transition had several implications, including reduced energy usage. However, the most significant change was the shift from mining to staking. Rather than relying on miners to verify transactions by solving complex computational puzzles, the Ethereum network is now secured by validators who "stake" or lock up their holdings.
Initially, the number of ether coins staked on the network was modest, raising security concerns. But since then, the number of staked ether has surged, reaching over 25 million and representing a 70% increase in 2023 alone. While decentralization and security improvements remain necessary, gains have been made, as about 18% of ether's total supply is now staked. With more ether locked up, the network will not only become more secure but also decrease the available supply of coins, a beneficial dynamic for price appreciation.
Ethereum enters a deflationary era
While The Merge dominated headlines in 2022, a lesser-known network upgrade called the London hard fork (implemented in August 2021) might prove to be more beneficial for Ethereum's long-term price appreciation. One of the primary features of the London hard fork was the introduction of a burn mechanism, resulting in a portion of the ether supply being permanently destroyed with every transaction.
Before the London hard fork, Ethereum had an annual supply increase rate of around 4.5%. However, since the beginning of 2023, Ethereum's supply has been decreasing at a rate of about 0.3%, with fewer ether in circulation today than six months ago.
Declining supply and increasing demand
The decline in Ethereum's available supply is slowly becoming evident based on the dwindling number of ether held on exchanges, currently at its lowest level in more than five years, with a 32% decrease since the beginning of 2023. With just over 15 million ether on exchange balances today, this decline is likely due to an increase in investor activity and more coins being locked up by holders. The number of active users on the network has also been steadily increasing since the start of the year, indicating growing demand, more transactions, and, thus, more ether being burned.
Shaking the cobwebs
Ethereum's network appears to be gaining strength and rebounding after a challenging period in the latter half of 2022 during the crypto winter. With the burn mechanism removing coins from circulation, there are genuine reasons to believe Ethereum could not only reclaim previous highs but also potentially surpass them.
When Ethereum hit its previous all-time high of $4,891, it was still hindered by annual supply growth of 4.5%. With the newly added mechanism to limit supply and signs that its network is gaining momentum, price is now subject to different supply and demand pressures. It will likely be a long and winding road, but over the long term, as Ethereum continues to benefit from the London hard fork and The Merge, it seems a $5,000 price tag is well within reach, making its current price of roughly $1,900 a sizable opportunity for long-term success.
