As the Shanghai update in Ethereum (ETH) approaches, the deflationary supply in the project draws attention.
The price of Ethereum’s native token, ETH, has risen more than 40% since the start of the year, rising to the $1,750 region, its highest level in the last seven months. However, the ETH price has yet to deliver the expected rise despite the Shanghai upswing.
Is Ethereum Price Bull Trap?
Cryptocurrency markets started to rise after the Federal Reserve slowed interest rate hikes and inflation began to decline. Ethereum has been affected by this situation and has risen like other assets.
At the same time, warnings of bull traps emerged in risky markets. This could wipe out investors’ recent profits. Ethereum faces similar risks due to its long-term correlation with equities and Bitcoin.
Below are a few potential bullish and bearish catalysts for Ethereum price. Let’s take a closer look to understand what’s going to happen.
ETH has become deflationary since the merger. The issuance rate of ETH has dropped to its lowest level since the network switched to the Proof of Stake (PoS) algorithm with The Merge in September.
Ethereum’s annual supply has slumped to 0.056% since the merger. The Ethereum network has minted fewer ETH tokens than has been taken out of supply in the past five months. Investors often perceive a cryptocurrency with a stable supply or deflationary issuance rate to be bullish in the long run.
Ethereum’s supply is currently around 120.50 million, but technically it does not have a maximum supply. However, the London hard fork in August 2021 introduced a fee-burning mechanism that adds deflationary features to ETH’s tokenomics. As a result of this upgrade, the higher the Ethereum network’s transaction fees are at any given time, the more ETH will be burned or removed from supply forever. Interestingly, the median gas price of Ethereum rose to a seven-month high of 27.13 Gwei last week.
For Ethereum price to rise, demand for ETH must not fall against a deflationary supply rate. The Shanghai update, which is expected to take place in March, is seen as a bullish catalyst for Ethereum.
The Shanghai update will allow users who lock their ETH to Ethereum’s PoS smart contract to withdraw their assets. According to independent market analyst Kennan Mell, this increased liquidity could encourage more people to stake ETH tokens.
Kennan Mell wrote in a note to SeekingAlpha: “Successful implementation of withdrawals of staked assets can increase the price of Ethereum.”
Apart from that, the total value locked in the Ethereum PoS contract continues to rise to new record highs. According to the latest data, the amount of ETH locked is worth $ 16.63 million.
Crypto Staking Edition
The above-mentioned potential bullish catalysts for ETH price could be offset by regulatory pressures and downside techniques in the near term.
The United States Securities and Exchange Commission (SEC) fined popular crypto exchange Kraken $30 million for failing to register its program that includes the option to stake Ethereum.
Coinbase CEO Brian Armstrong also warned that the SEC could completely ban crypto staking services for retail investors. If that happens, it could hurt demand for ETH among US investors.
ETH Price Reaches Lower Level
From a technical perspective, Ethereum price is currently testing a significant resistance for a potential pullback.
This resistance point consists of the monthly descending trendline resistance and the 50-week exponential moving average.
A pullback from this point could allow ETH price to test the 200-week EMA near $1,550 as its short-term downside target.
Also, a correction could push the price towards the trendline support around $1,200 by March 2023, resulting in a pullback of around 30% from current levels.
A decisive break above the descending trendline resistance could support a rise towards the $2,000 and $2,500 region.
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