Ether Demand Spike Could Lead to Supply Crunch, Warns Ethereum Co-Founder
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Ethereum (ETH), the second-largest cryptocurrency by market value, surged almost 20% on Monday and continued to rise on Tuesday. This came right after the Securities and Exchange Commission (SEC) showed interest in approving spot Ethereum exchange-traded funds (ETFs) after months of anticipation. However, there is a catch here; this potential approval could lead to a significant supply crunch for Ether (ETH), according to Joe Lubin, co-founder of Ethereum and CEO of Consensys.
Institutional Demand and Diversification
Speaking to DL News, Lubin explained that institutions that have already gained exposure to Bitcoin through its recently launched ETFs will likely seek to diversify their portfolios by investing in Ethereum ETFs. He highlighted a substantial “natural, pent-up pressure to purchase Ether” through these ETFs. This demand surge is expected to be more intense than that experienced during the approval of spot Bitcoin ETFs earlier this year.
Unique Supply Constraints and Market Impact
Unlike Bitcoin, Ether faces several unique supply constraints. Firstly, over 27% of Ether’s total supply is currently staked across the Ethereum network. These staked tokens are locked in contracts and earn yields for their owners, making them unavailable for immediate purchase by ETFs.
On second thought, many Ether is tied up in core protocol functions, decentralized finance (DeFi) systems, and decentralized autonomous organizations (DAOs). This further limits the liquid supply of Ether available for ETF consumption.
Finally, Increased activity on the Ethereum network results in a substantial burn of Ether supply over time, as per the network’s fee-burning mechanism introduced with the EIP-1559 upgrade. This ongoing burn will further constrain the available supply.
Moving on to market impact, Lubin noted that Ether’s market value is currently lower than Bitcoin’s, making its price more reactive to inflows. High demand and limited supply could lead to a significant price surge.
Will it be a Watershed Moment for Ethereum?
“This could be a pretty profound watershed moment for Ethereum and the crypto industry as a whole,” Lubin said.
The impending approval of Ethereum ETFs could catalyze substantial changes in the market dynamics, highlighting the importance of understanding these unique supply constraints.
Notably, the expected approval of Ether ETFs emphasizes the importance for investors to consider how limited supply and heightened market activity could impact Ethereum’s future value.
Currently, Ethereum’s fate hangs on the SEC’s upcoming decision. Approval could lead to further price increases, while rejection might trigger a decline. ETH has surged by 21.88% in the last 24 hours, accompanied by a significant spike in purchasing activity, up by 336% as per CoinMarketCap data.
