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Why the Merge of Ethereum won't stop its price from declining

The anticipated price increase, nevertheless, never materialized. In reality, following the update, Ether has decreased by more than 7%. So why did the coin's value not increase after the Merge?

Photo by Nicolas Lobos / Unsplash

In September, Ethereum finally underwent its long-awaited Merge, changing its consensus algorithm from the dated proof-of-work paradigm to the more reliable proof-of-stake. Many analysts anticipated that Ether's price would increase when its daily emissions decreased by 90% due to the cessation of mining.

The anticipated price increase, nevertheless, never materialized. In reality, following the update, Ether has decreased by more than 7%. So why did the coin's value not increase after the Merge?

Why did ETH price not rise

The only monetary policy adopted by Ethereum (1) was to limit the daily production of tokens to 1,600 ETH. As mining incentives under the PoW mechanism, 13,000 ETH were released daily. However, as mining activities are no longer legitimate under the PoS paradigm, this has been completely eradicated post-Merge.

As a result, the amount of ETH available for staking rewards has been reduced to 1,600, or 90% of its daily supply. The 1,600 ETH would be burnt every day if the Ethereum network's average gas price rose to at least 16 gwei, eliminating Ethereum's inflation or even causing a deflation. This monetary strategy significantly influenced the anticipation of a price increase for Ether. Users, however, did not consider the effects of legislative changes and marketing sentiment. The deflationary concept was developed to have a long-term effect on the price of ETH when the blockchain's supply growth is negative.

Since the Merge (2), the token supply has grown by -0.01%, which implies that about the same amount of ETH was created as was consumed by transaction fees. Even though this statistic shows deflation, it has little impact on the token's price, especially given the continued high level of liquidation in the cryptocurrency market.

Current ETH deflation

ETH is currently depreciating. Over the last two weeks, more than 10,000 fewer tokens have been in circulation, while 3,037 additional tokens have joined the market after the Merge. Until October 8, the number of new tokens rose as inflation persisted on Ethereum. As a result of increased transaction fees, more tokens have been burnt, making ETH deflationary. At an average rate of 1.15 tokens per minute during the past 30 days, more than 49,000 ETH have been burned. It appears that the supply of Ether has peaked and will continue to rise much less.

It was mostly because of a recent XEN Crypto blockchain initiative (3). With nearly 5,391 ETH lost in transaction fees since its introduction, XEN Crypto is second on the list of the most ETH burned, just behind Uniswap V3. Between October 8 and 15, many transactions and ERC-20 tokens were minted. This deflation was brought on by the average gas price that week, which was 37 gwei, more than double the 15 gwei. The network will burn enough tokens to maintain deflation for the time being as long as Ethereum's gas price is over 15 gwei.

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What's the problem now?

Although Merge's process and the present deflation are theoretically intended to raise prices, the time is not right. Any cryptocurrency's price is not just determined by its supply and burn mechanism; liquidation also has a big impact. In recent months, the U.S. Federal Reserve has rapidly raised interest rates. As a result, treasury bonds issued by the government have been yielding significantly, and these bonds carry far fewer risks than cryptocurrency. Additionally, there is increased regulatory pressure on the cryptocurrency market, and short-term investors are moving away from risky assets as the recession is out of control.

Deflation will have a long-term effect.

Deflation will undoubtedly have an effect in the long run. A bullish cycle will result in more network utilization and higher gas prices. The token's supply will be significant, and a price spike may ensue. Since ETH prices appear to have hit a sustained resistance level, liquidation has been waning recently. However, the market's mood will determine whether or not a bullish cycle emerges shortly.